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2 ASX shares to buy and 2 to avoid as deflation bites

Young boy sitting at desk holding chalkboard sign with 'Deflation' and 'Inflation' written on it.
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You’ve likely heard that Australia has just entered a period of historic deflation.

Despite what you may be reading in some financial headlines, that’s not all bad news. Far from it…

According to the latest data from the Australian Bureau of Statistics (ABS) the Consumer Price Index (CPI) fell 1.9% in the June 2020 quarter. “This was the largest quarterly fall in the 72-year history of the CPI,” said chief economist for the ABS, Bruce Hockman.

This brings the annual inflation rate to -0.3% for the year through the end of June.

The record price falls were largely due to the government providing free child care and plummeting petrol prices. Rents also headed lower. Not surprisingly, the price of cleaning and maintenance products bucked the trend, gaining 6.2%. Hand sanitiser, anyone?

Why deflation isn’t the Hydra it’s made out to be

I’ll avoid a deep dive into the deflation debate and just skim the surface here.

You’ll most often hear deflation is bad because consumers will put off spending money today if they know they can get the same item cheaper tomorrow.

In a world of hyper-deflation, where prices are falling by, say, 10% each day, that may be true. But if prices are falling by 0.3% per year that’s hardly going to keep you from buying that new couch or pair of running shoes.

No nation in the world has ever experienced anything approaching hyper-deflation. And I’ll stick my neck out and say none ever will.

So why is the Reserve Bank of Australia so focused on its 2–3% inflation target?

The simple answer is debt. According to the Australian Debt Clock, total government debt now stands at over $1.17 trillion dollars. With an inflation rate of 3%, the real value of that debt will fall to ‘just’ $585 billion in 24 years without having to pay back a cent.

Enough said.

Here’s the good news

Not only will the cash in your wallet hold its value — or even gain a bit — in a deflationary scenario, but the real returns (inflation-adjusted) of your stock holdings will gain as well.

The even better news for equity investors is that the latest deflation numbers indicate interest rates should stay at record lows for a long time yet. And the share markets tend to love low interest rates. Beyond that, we can expect continued quantitative easing (QE) from the Reserve Bank of Australia, which also helps fuel equity prices.

But not all ASX shares will benefit equally. In fact, some are likely to suffer.

2 ASX shares to avoid

In general, I’d tread carefully around property developers and real estate investment trusts (REITs) in the current environment. Their time will come again, but many are facing stiff headwinds.

The latest statistics from the ABS show that rents across Australia fell during the last quarter. That marks the first quarterly fall since 1972.

The first ASX share I’d steer clear of is Stockland Corporation Ltd (ASX: SGP). Stockland owns residential, industrial and retail properties, along with retirement homes.

It was a great stock to own in 2019, gaining more than 38%. But 2020 has been a different story, with the share price down more than 30% so far this year. And with a gloomy mid-term outlook for the Aussie property markets, I believe it could have a good bit further to fall from its current share price of $3.22.

The second ASX share I’d avoid is Scentre Group (ASX: SCG). Scentre owns and operates Westfield shopping malls in both Australia and New Zealand. The impact of COVID-19 saw it suspend its interim dividend distribution. And the Scentre share price has already tumbled more than 47% this year.

There’ll be a time to revisit Scentre. But I don’t believe now is that time.

2 ASX shares to buy

It’s no secret the technology sector has, on average, outperformed the broader market this year.

Many tech shares will be resilient in today’s mildly deflationary environment. After all, the price of most electronic goods, and the parts inside them, tend to get cheaper over time regardless. And with remote working, shopping and even dating likely to be a growing trend in the decade ahead, here are 2 ASX shares that are well placed to benefit.

First, Altium Limited (ASX: ALU). The company, with a market cap of $4.3 billion, specialises in electronic printed circuit boards. These are crucial to the growth of the burgeoning 5G market and every kind of smart device you can imagine.

Altium hasn’t fully recovered from its steep plunge in February. The share price is still down 3.6% year-to-date. But at its current price of $33.12, I think it could go a lot higher in the months ahead.

The second ASX share you should consider adding to your portfolio, in my opinion, is Appen Ltd (ASX: APX). Appen, with a market cap of $4.4 billion, provides data to improve artificial intelligence systems, a market with sky-high growth potential.

The Appen share price is up 63.8% since 2 January, but I believe it could have much further to run.

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Returns as of 6th October 2020

Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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