There is much debate about inflation peaking, but even if the top has passed it is still extraordinarily high for comfort.
For the 12 months ending December, Australia’s consumer price index rose 7.8%.
That means $100 in your wallet a year ago is now worth just $92.20.
So passing the peak is somewhat meaningless for all those consumers out there whose spending power has been decimated.
According to DeVere Group chief Nigel Green, this has a severe impact on stock investors too.
“Stubborn inflation affects stock markets because central banks — including the [US] Fed, Bank of England and European Central Bank — will have to continue to step in and raise interest rates,” he said.
“This means people adjust and rein-in their spending, it cools the economy and companies can struggle to make profits.”
The trouble is that prices of ASX shares are correlated to profitability of the underlying businesses.
“In this environment of higher rates for longer than had previously been anticipated, some companies are going to find it difficult to maintain margin and, as weâre now seeing, are failing to report earnings as had been expected,” said Green.
“In other words, if costs are going up, firms can’t maintain margin, so that company is unlikely to be a good investment until things change.”
What’s more, the current high level of inflation means any investments you make have to return 7.8% per annum for it to just break even.
Four sectors that will keep earning in 2023
So it’s a tough time to pick the right stocks.
To assist, Green’s team identified four sectors that might prove to be “resilient in this current environment”.
“We’re looking at sectors that can maintain margin, despite inflation and interest rate hikes,” said Green.
“These include healthcare, luxury goods, energy and agriculture.”
Healthcare is “robust” through economic downturns because everyone still needs to look after their health regardless of disposable income.
Green added that this thesis has become even more prevalent since the COVID-19 pandemic.
“Also, despite wider market volatility, there’s strong earnings potential due to ageing populations and other demographic changes,” he said.
“Plus, healthcare is becoming increasingly tech-driven, which offers fresh opportunities.”
Luxury goods might be a surprising sector to back during tougher economic times.
But Green argues that producers of aspirational “elite and exclusive” goods can maintain their large margins from affluent clientele that may not suffer from a drop in income as much as others.
“We’ll look at energy because there’s a shortage of energy in the world right now,” he said.
“Agriculture is another one as populations in emerging markets around the world are eating more meat. As they eat more meat, there needs to be more grain produced.”
Aside from picking the right stocks and sectors, Green reminded investors that the most important defensive tool is diversification.
“Inflation is going to be an issue for investors for a while yet,” he said.
“However, these can also be times of opportunity if you stay fully and wisely invested.”
The post Inflation refuses to die: Expert reveals where to invest your hard-earned appeared first on The Motley Fool Australia.
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