With inflation on the horizon, S&P/ASX 200 Index (ASX: XJO) mining and banking shares should be in your sights. Not to mention your share portfolio.
That's because ASX 200 financial shares and ASX 200 resource shares tend to outperform technology and other growth shares during inflationary periods, when central banks may be forced to raise interest rates sooner and higher than many expect.
Now inflation may not be a concern today. And according to placating words from the world's leading central bankers (we're looking at you Jerome Powell, Philip Lowe and Christine Lagarde) they're in no hurry to lift their official cash rates even if inflation does return to within target levels.
Stay calm, investors have been told. Rates will, almost certainly, remain at rock bottom levels until at least 2024.
But long-term government bond yields have told a potentially different story. With US 10-year Treasury notes recently spiking to 1.62%, the highest level since before the global pandemic, the bond market is clearly getting a tad jittery about what was for so long lamented as "stubbornly absent" inflation.
And share market investors would do well to take note.
The case for ASX 200 mining and banking shares in an inflationary environment
According to Perennial Value Management portfolio manager Dan Bosscher, inflation looks to be coming, though it's yet to show up in the economic data.
Bosscher says (as quoted by the Australian Financial Review):
Inflation is the topic of the day – whether the inflationary outlook is going to be real or not. The five year/five year breakeven has been going up for six months and there's been no inflation prints yet. The market is saying they can see it but it's not in the economic data yet. If I didn't follow that, I wouldn't know that maybe I should be long commodities because they work well in an inflationary environment.
Two of the ASX 200 shares that Bosscher holds in a portfolio of only 20 companies are mining giant BHP Group Ltd (ASX: BHP) and banking behemoth Australia and New Zealand Banking Group Ltd (ASX: ANZ).
"They fit with my view that the reflation story is real. I don't think that we are going to have rampant inflation but I think it's pretty clear that the market is pointing in that direction," Bosscher said.
BHP share price and ANZ share price snapshots
Up 0.5% in late afternoon trading today, ANZ shares have gained an impressive 101.2% over the past 12 months. That compares to a 48.7% gain on the ASX 200. Year-to-date the ANZ share price is up 23.1%. ANZ pays an annual dividend yield of 2.1%, fully franked.
BHP shares are slipping today, down 0.89% at the time of writing. Over the past 12 months, the BHP share price is up 64% with a gain of 3.3% so far in 2021. BHP pays an annual dividend yield of 4.6%, fully franked.
