Should ASX investors be fearful of greed in the face of inflation?

ASX investors are turning their attention to the potential risks and rewards as rising inflation fears present some opportunities.

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ASX investors are turning their attention from the potential risks and rewards thrown up by the pandemic to how best to play rising inflation fears.

Fear sets in when the wider financial news narrative indicates that the resurgent inflation witnessed across much of the developed world could be entrenched. Meaning central banks may be forced to raise official interest rates from their rock bottom lows. A move many shares on the ASX almost certainly won’t like.

Greed sets in when the narrative, widely supported by the central bankers themselves, shift to indicate that the current price rises are only transitory. Meaning inflation over the coming few years will remain subdued. Interest rates will remain at record lows. And shares on the ASX will continue to enjoy that welcome easy money tailwind.

Inflation’s outlook for the ASX

For a better idea of how to position your ASX investment portfolio as inflation re-emerges following a lengthy hibernation, we turn to the experts.

According to UBS Global Wealth Management’s Chief Investment Officer Mark Haefele (quoted by Bloomberg):

Investors should brace for further bouts of volatility, driven by inflation data along with other risks, such as setbacks in curbing the pandemic. But we don’t see inflation concerns ending the rally in stocks, which we expect to be led by cyclical parts of the market as the global economic reopening broadens.

Inflation’s impact on the ASX was a hot topic at yesterday’s Stockbrokers and Financial Advisers Association conference as well.

Jun Bei Liu, portfolio manager at Tribeca Investment Partners, said (quoted by the Australian Financial Review):

It’s too early to call if inflation is structural, it seems like it’s transitory but we have to take another six months before we know if it’s long standing. In this environment, you want to be in companies that can pass on that inflation and these are the leaders of the sectors – pick them up as they get sold off because we don’t know how long this inflation will last.

Andrew Smith, head of smaller companies at Perennial Value Management added:

Inflation does influence the cost and price of money and naturally pushes people towards cash flows that are more near-term, so yes, it pushes people towards more value style investments. But it can be dangerous for some value stocks too. Value stocks sometimes have low margins, low pricing power and that’s where inflation will kill your earnings.

Which shares are looking promising in 2021?

Tribeca’s Liu has a broadly bullish outlook for the ASX this year. She points to Treasury Wine Estates Ltd (ASX: TWE) and Xero Limited (ASX: XRO) as companies that look particularly well-positioned.

The market is looking really strong towards the end of the year so you want to buy businesses where its share price doesn’t reflect its strong business model such as Treasury Wine Estates and growth leaders such as Xero.

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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 Xero. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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