Share markets have seen volatility this year due to one factor: the possibility of inflation as the world recovers from a COVID-19 recession.
Rising inflation could trigger interest rates to move up. And this would be a punch to the fortunes of many ASX shares that are currently valued as if near-zero rates would continue forever.
Fortunately, there are defensive stocks that are set to do well in a higher inflation world.
According to Pengana Capital chief investment officer Rhett Kessler, his fund has been focusing "laser-like" on businesses that have "hard assets".
"It's a company that has assets which provide it with the pricing power to pass on any input costs to their customers."
There are 4 ways an organisation can achieve this nirvana, he said:
- Long-term contractual arrangements with strong counterparties
- Owning unique or scarce assets
- Being the lowest-cost producer in the sector
- Owning superior non-trivial intellectual property
Kessler's fund, among its top 10 biggest holdings, owns several shares that meet one or more of this inflation-proof criteria.
Here are 4 of them, as he told a Pengana investor webinar last week:
CSL Limited (ASX: CSL) and Aristocrat Leisure Limited (ASX: ALL)
CSL is Pengana Australian fund's 4th largest holding, while Aristocrat is 8th.
Kessler strongly rates the healthcare giant and the gaming provider for one massive reason.
"CSL and Aristocrat have really strong intellectual property that they're able to monetise."
CSL was up 0.98% on Wednesday to trade at $271.01 upon close. Aristocrat gained 1% for the day to end the session at $37.46.
Kessler is not the only one optimistic about these 2 ASX stocks.
Last week Citi rated CSL as a "buy" while putting on a price target of $310. The brokers there have high hopes for its plasma collection business as more Americans are vaccinated against the coronavirus.
Citi also rated Aristocrat as a "buy" while giving it a target of $40.60. Again, the reopening of US society is expected to lift demand for the company's gambling machines.
Woolworths Group Ltd (ASX: WOW)
The supermarket giant is the 10th largest holding for Pengana.
According to Kessler, it is very easy to explain Woolies' appeal in inflationary times.
"Woolworths will actually move the same amount of boxes in an inflationary environment, but for more money," he said.
"So your absolute level of profitability should go up."
Already there are plenty of signs that grocery bills are going up, with international prices for staples like corn, wheat and soybeans all shooting up.
Last week, Goldman Sachs agreed with Kessler, rating Woolies as a "buy" with a price target of $43.60. It ended Wednesday at $41.41.
Telstra Corporation Ltd (ASX: TLS)
The telecommunications giant is Pengana's largest holding "by quite a long way".
"We have it as just under 8% of our portfolio," said Kessler.
And no wonder, as it meets multiple of Kessler's criteria for holding "hard assets".
"Its businesses are unique assets and are the lowest-cost producer," he said.
"And a really nice chunk of it – 25 cents in every dollar – is actually an inflation-protected business, which is that it gets an income stream from the NBN, which is linked to inflation."
Telstra closed Wednesday 0.59%, trading at $3.40.
Ord Minnett brokers also love the telco, currently rating the stock as a "buy" with a target of $4.05.
Of course, Telstra's other advantage is the potential for nice dividends.
"A prospective dividend yield of 5% is certainly not to be sneezed at," Kessler said.
