High inflation has hurt household budgets, some business profits and caused central banks to hike interest rates. There are some leading S&P/ASX 200 Index (ASX: XJO) shares that I've got on my watchlist that I may pounce on.
Impacts from the COVID-19 period impacted both supply and demand in the global economy. To take demand out of the economy, central banks took interest rates back to pre-COVID times, and then kept going.
In the Reserve Bank of Australia's (RBA) most recent monthly update, it said that CPI inflation over the year to December 2022 was 7.8%, the highest since 1990. In underlying terms, inflation was 6.9%, which was higher than expected. Domestic demand is "adding to the inflation pressures."
The RBA said inflation is expected to decline this year, with both global factors and slower growth in domestic demand. The central forecast is for CPI inflation to decline to 4.75% in 2023 and to around 3% by mid-2025.
It was recently reported that the 'core personal consumption expenditure price index' in the US, which is the Federal Reserve's preferred measure of inflation, saw a 0.6% rise in January, with a 4.7% increase from the prior year, which was above economists' expectations.
This could mean that the Federal Reserve needs to keep increasing interest rates to end elevated inflation.
But, I think these two ASX 200 shares look like compelling ideas in this environment.
Brickworks Limited (ASX: BKW)
Brickworks is one of the leading building product manufacturers in Australia. It's the leading brickmaker in Australia, while also having a strong presence in areas like masonry and roofing.
The outlook for the housing market and construction in Australia is weaker than in 2021 because of the current economic climate. But, I think there will be another period of strength in the future, so I think this period of weakness could be a prime time to invest.
I think the ASX 200 share's half-ownership of the two industrial property trusts along with Goodman Group (ASX: GMG) is very useful – it's giving it a source of growing cash flow thanks to the rental profit, as well as growing underlying value thanks to finishing warehouse property developments.
Those industrial properties are benefiting from structural tailwinds, fuelling strong demand for prime industrial property. The developments are "increasingly sophisticated, incorporating features such as robotics, automation and multi-storey warehousing and providing critical supply chain and logistics solutions" for customers.
I think the industrial property, plus the holding of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares, give the business a lot of underlying value and protection.
Brickworks revealed that at the end of its last financial year, it had a net inferred asset backing which equated to around $33 per share, but that value does shift around as the Soul Pattinson share price changes.
Pinnacle Investment Management Group Ltd (ASX: PNI)
Pinnacle is a business that invests in funds management businesses and helps them grow. The business partners with leading fund managers that want to start or grow their own businesses. Pinnacle can help with tasks like legal, compliance, reporting, seed funds under management (FUM) and so on.
Since early November 2021, the Pinnacle share price has dropped by around 45%. I think that makes it a great time to consider investing in the business.
It's not surprising to me that the business has suffered. Not only has the underlying FUM been hurt by falling asset markets, but investors may be more likely to pull their money out and less likely to put money into one of the fund managers that Pinnacle is invested in.
I think that when inflation slows and interest rates stop rising (and even begin to fall), the FUM could naturally start rising and investors may be more confident about putting money to work with one of the ASX 200 share's fund managers.
