Experts recommend a carefully targeted portfolio including commodities and firms with pricing power to help avoid negative returns and loss of purchasing power.
. Pull the cord too early and the economy drifts. Pull too late and there’s a thud.
Headline inflation in Australia was 3.5 per cent through 2021. That’s nothing compared to the United States, where inflation over the year to March hit a 41-year high of 8.5 per cent. That has prompted talk that US inflation is hurtling towards double-digit rates, if not there already. Fortlake Asset Management’s Christian Baylis: “We could have a steep upward trajectory in wage costs when a number of enterprise bargaining agreements expire this year.”The Reserve Bank of Australia’s data-dependent approach to inflation adds other risks, says Baylis. “The RBA’s narrative is now one of reacting to economic data on inflation rather than changing monetary policy based on forecasts. That allows inflation expectations to become more entrenched.
Peter Warnes, head of equities research at Morningstar Australasia, is concerned about inflation. “The RBA is in denial. It is simply not in touch with the real economy and what’s actually happening with rising living costs. Inflation is a big issue for investors.” Warnes says investors should reduce their exposure to equity markets, hold more cash in their portfolio and. “The next few years will be a period of lower sharemarket returns, increased risk and higher volatility. Income will provide a larger part of the total sharemarket return and investors will have to be very selective. The easy gains are over.”
Taylor says Australia is well-placed to handle rising inflation. “Commodities tend to outperform when inflation rises and resource exports are a large part of our economy. Also, as commodity prices rise, the Australian dollar tends to rise, which is in itself deflationary . Our economy has some in-built inflation buffers.”The Australian sharemarket’s composition is another factor.
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