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Anti-inflation allocations needed now

inflation real assets

Real assets and sustainable growth companies should dominate investment portfolios as the economy is moving into a higher phase of inflation.

Investment portfolios need to focus on real assets and companies with sustainable growth to guard against inflation, an Australian equities manager has recommended.

According to Datt Capital founder Emanuel Datt, the presence of inflation is already evident in the local economy, despite government announcements to the contrary.

“In practical terms, we’ve seen broad price rises in almost every aspect of everyday life across the board over the past 12 months. We ourselves have noticed large price increases in an array of services, such as Uber fares, home food delivery prices and the cost of skilled blue-collar services like plumbing. We have also observed that hardware wholesalers have recently at times experienced shortages of basic items such as timber,” Datt noted.

To counter this economic shift, he suggested individuals look to invest in tangible assets, such as hard commodities, including precious and base metals, soft commodities, including agricultural products, real estate and listed equities.

“We also consider companies experiencing sustainable organic growth are attractive in this environment, as typically growth multiples contract in line with inflation, allowing investors with a longer time horizon to benefit from purchasing these assets at lower, out-of-cycle valuations,” he said.

On the other hand, he warned investors to avoid sectors such as fast-moving consumer goods (FMCG) and direct-to-customer (DTC) technology firms.

“FMCG companies are generally disproportionately affected by rises in commodity prices due to higher input costs. Generally, packet sizes are reduced to attempt to maintain margins with eventual shifts towards increased end prices which tend to reduce overall margins,” he said.

“DTC technology companies tend to be exposed to a deflationary price environment over time with little pricing power. This factor means that price rises to customers are difficult despite higher input costs.”

In addition, he pointed out investors should seek assets with a high rate of return, making fixed income allocations unattractive at this time.

“Fixed income assets have negative exposure to inflation because coupons are generally fixed. Even if they are floating coupons, they are generally priced off rates that are linked to a government set cash rate which does not reflect the true cost of finance at a given point,” he said.

“Accordingly, we believe investors should take care in the current environment to select investments that can deliver rates of return well above official inflation figures, as well as thinking carefully about which particular sectors and assets they invest into.”

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