The great inflation debate continues.
And the question many S&P/ASX 200 Index (ASX: XJO) investors are asking is, which shares in my portfolio will suffer if inflation picks up and which ASX 200 shares will perform best.
Now, there's no consensus yet on when inflation will truly pick up the pace.
The Reserve Bank of Australia has echoed other leading central banks like the US Federal Reserve and European Central Bank in saying it's not overly concerned with inflation in the next few years. That could mean interest rates indeed remain at rock bottom levels until 2024. But global bond markets have been indicating a potentially different outcome. The US 10-year Treasury yield currently stands at 1.69%. While that's low by historic standards, it's well above the 1.04% yield as recently as 27 January.
So what should ASX 200 investors concerned about rising inflation do?
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Risk of inflation above 3% increasing
Christian Mueller-Glissmann is the managing director for portfolio strategy and asset allocation at Goldman Sachs Group Inc.
As Bloomberg reports, Mueller-Glissmann says that "A scenario of sustained inflation above 3% and rising is not our base case, but that risk has definitely increased compared with the previous cycle."
So how does Goldman Sachs recommend investors position themselves if indeed we're in for a run of high inflation?
If you're thinking of the old fallback, gold, you may want to think again.
According to Mueller-Glissmann:
We found that during a high inflation backdrop, commodities, especially oil, are the best hedge. They have the best track record in the past 100 years to protect you from unanticipated inflation – one that's driven by scarcity of goods and services, and even wage inflation like that in the late 60s. Equities have a mixed tracked record. We like value stocks as they are short duration.
The biggest surprise is gold. People often see gold as the most obvious inflation hedge. But it all depends on the Fed's reaction function to inflation. If the central bank doesn't anchor back-end yields, then gold is probably not a good choice as real yields might rise. We see index-linked bonds as in the same camp as gold.
There are a number of ASX oil shares that could help protect you from unanticipated inflation.
Indeed, though Donald Horne may have intended it ironically when he labelled Australia the Lucky Country in his 1964 novel of the same name, Australia has a vast trove of oil and gas reserves, along with numerous other valuable resources.
Two leading ASX 200 oil shares
For the purposes of this article, we'll stick with 2 of the dominant ASX 200 oil shares.
First up is Santos Ltd (ASX:STO).
The Santos share price is slipping today, down 2%, but Santos shares remain up 12% for the year. Over the past 12 months, the Santos share price has soared 146%, compared to a 48% gain on the ASX 200. At the current price of $17.18 per share, Santos has a market cap of $15.0 billion. Santos pays a dividend yield of 1.3%, fully franked. Morgan Stanley has a buy rating on Santos shares.
Next, we turn to Oil Search Ltd (ASX:OSH).
Oil Search shares are also sliding today, down just over. Year-to-date the Oil Search share price is up 13% with shares up 132% over the past 12 months. At the current $4.25 per share, Oil Search has a market cap of $8.9 billion. Oil Search pays an annual dividend yield of 1.7%, unfranked.
