Which ASX 200 shares have historically performed well during rising inflation?

Inflation just spiked up again this quarter.

| More on:
A girl stands at a wooden fence holding a big, inflated balloon looking at dark clouds looming ominously behind her.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Australian inflation continues to build pressure, with data showing another quarter of price increases
  • Investors may or may not be feeling the pain from the economic fallout, which tends to eat into company margins and investment returns
  • Here's what some of the experts say about the thought process required when seeking to protect capital in inflationary times

Inflation is now the word of the day. Today, Australian CPI was printed at 5.1% for the three months until 31 March 2022.

It doesn't appear the market has taken the news very well. The benchmark S&P/ASX 200 Index (ASX: XJO) is down 63 basis points at the time of writing.

As commodity markets continue to boom and food prices look set for a green period, market pundits are positioning to avoid the fallout of rising inflation.

What shares do well in inflationary periods?

Inflation can be a real pain to investors. Especially at the retail end because it has a direct impact on investment returns.

Returns are measured in nominal and real terms, with the latter accounting to adjust for inflation. Put simply, inflation eats into real savings and investment gains by reducing purchasing power.

"Inflation poses a threat to investors because it chips away at real savings and investment returns," according to analysis from fixed-income giant Pimco.

Most investors aim to increase their long-term purchasing power. Inflation puts this goal at risk because investment returns must first keep up with the rate of inflation in order to increase real purchasing power.

For example, an investment that returns 2 per cent before inflation in an environment of 3 per cent inflation will produce a negative return (-1 per cent) when adjusted for inflation.

Going to the archives, research analysts at JP Morgan have uncovered some interesting findings.

Curiously, investigations by the broker reveal that materials, industrials and financials sectors each demonstrate strength when consumer expectations of inflation rise. Whilst more growth-type assets flounder.

"Cyclical sectors such as financials, industrials, materials and energy, tend to outperform the global benchmark in periods of rising inflation expectations," the broker wrote.

By contrast, defensives and growth stocks tend to struggle. Technology is the sector that looks most vulnerable today, given their valuations have likely benefitted from the low interest rates and flat yield curves over the past couple of years.

Pimco suggests the same, noting that "[m]any commodity-based assets, such as commodity indexes, can help cushion a portfolio against inflation because their total returns usually rise in an inflationary environment."

What instruments are out there?

Along those lines, the BetaShares Global Energy Companies ETF (ASX: FUEL) offers investors diversified exposure to the energy sector. Meanwhile, the BetaShares Global Banks ETF (ASX: BNKS) lends the same, albeit in financials.

For global 'inflation-protected' exposure, the Fidelity Stocks for Inflation ETF (BATS: FCPI) might pique investor interest. It's an index fund that tracks the Fidelity Stocks for Inflation Factor Index.

According to S&P Global:

[The] Fidelity Stocks for Inflation Factor Index is designed to reflect the performance of stocks of large- and mid-capitalization U.S. companies with attractive valuations, high quality profiles, and positive momentum signals, with structural tilts to sectors that tend to outperform in inflationary environments.

Some of the top holdings include Apple Inc (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT) and Marathon Oil Corporation (NYSE: MRO).

As the investment landscape keeps evolving, it appears these baskets are poised to perform amid the inflationary pressures. But only time will tell.

Motley Fool contributor Zach Bristow owns Microsoft. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Apple, BetaShares Global Banks ETF - Currency Hedged, BetaShares Global Energy Companies ETF - Currency Hedged, and Microsoft. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on How to invest

A business person holds a big balloon in front of their face.
How to invest

I'm fine with a stock market crash. You might be too

This article might leave you longing for a ride to the downside.

Read more »

Humorous child with homemade money-making machine.
How to invest

How I'd fill an empty ASX share portfolio to build a $500 monthly passive income machine

Building an ASX passive income portfolio simpler than you may think.

Read more »

A smiling woman with a handful of $100 notes, indicating strong dividend payments
How to invest

How to realistically turn a $7,000 ASX share portfolio into $75,000 by 2030

The Australian share market is a great place to grow your wealth. Over the years, countless Aussies have constructed ASX…

Read more »

Happy young couple saving money in piggy bank.
How to invest

4 steps to becoming rich with ASX stocks

These are the steps I would take to grow my wealth materially.

Read more »

Person with a handful of Australian dollar notes, symbolising dividends.
Investing Strategies

Want cash like Warren? How to stack paper without ditching ASX shares

Life is about trade offs.

Read more »

five people in colourful blow up tubes in a resort style pool gather and smile in a relaxed holiday picture.
Dividend Investing

5 simple steps to earning $500 in monthly ASX passive income

Almost any investor can build a $500 monthly passive income from ASX dividend shares.

Read more »

A businesswoman on the phone is shocked as she looks at her watch, she's running out of time.
How to invest

How timing the market can cost you big dollars

And one simple way ASX investors can avoid the urge...

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
How to invest

5 easy ways to invest like Warren Buffett with ASX shares

Here’s how we can imitate Warren Buffett with ASX shares.

Read more »