If you have gone about your investment in 2022 so far without hearing the word 'inflation', then you'd be doing very well. Inflation, and the prospect of higher interest rates that usually come with it, has been a dominant theme of the year so far. Speculation that central banks around the world will raise interest rates and curb quantitative easing (QE) programs has been spooking investors for months now, and is a major factor in the volatility we have seen on the share market recently.
So if higher inflation is coming, will it really be terrible for all ASX shares?
Well, the answer is complicated. Inflation is a challenge for all businesses, seeing as it comes with rising input costs. In a high inflation environment, costs such as labour, transport and raw materials typically rise and keep rising. That means a business has to match these rises with passed-on price increases of its own. Not exactly a recipe to keep customers happy and loyal.
But when it comes to a business's ability to pass these costs on, some businesses are more equal than others.
Fund maanger: How to beat inflation in your ASX share portfolio
Tim Carleton is principal at fund manager Auscap Asset Management. He recently gave an interview with the Australian Financial Review (AFR). He says that some companies can handle inflation better than others. And finding them isn't always difficult:
It's not rocket science… It's finding companies that have proven themselves to be high-quality companies. And broadly, you've got a bit of a cheat function to determine whether something's a high-quality company, and that's go and have a look at its statutory ROI [return on investment]…
Everyone talks about moats and competitive advantages. Well, if they have a demonstrably higher ROI than their peers, there's obviously something there.
So there you have it, what to look out for if you're searching for an inflation-proof investment in this Brave New World of inflation we are entering. For starters, Carleton names BHP Group Ltd (ASX: BHP) and REA Group Limited (ASX: REA) as two shares that he sees as fitting into the above criteria.
But if you're still a bit worried about what the future holds, remember this. The ASX and global markets have seen periods of high inflation before. And while it has always caused some disruptions, markets have never failed to move higher, sooner or later. That's a sentiment Mr Carleton echoes:
The reality is, the Aussie market, the US market, most markets have climbed walls of worry in the last 100 years, and still delivered the best returns over different asset classes.
A silver lining for every cloud!
