Why investors don’t need to worry about rising inflation

ASX growth shares have been hammered, but will this fear stick around or is this now the perfect time to pick up some bargains?

A smiling woman holds a sign saying 'Don't panic', indicating unwanted share price movement

Image source: Getty Images

Rising inflation is nothing to worry about for stock investors, according to multiple experts.

The current economic recovery after the COVID-19 downturn has ironically been a bogey for growth shares

A fear of subsequent rising inflation and interest rates has seen the valuations of growth businesses hammered over the last 6 months.

The S&P ASX All Technology Index (ASX: XTX), for example, has sunk 8% since the start of the year. It’s dropped almost 15% off its 52-week high.

“It’s been a violent selloff out there,” Forager Funds chief executive Steve Johnson said in a video to investors this week.

“Good quality tech companies are down with Xero Limited (ASX: XRO) 23% off its peak and even the poster child for the growth sector, Afterpay Ltd (ASX: APT), is now down 45% from its peak just a couple of months ago.”

So should we be worried? How long will growth stocks be out of favour?

Remember how we worried machines would take our jobs?

Montgomery Investments chief investment officer Roger Montgomery is shocked at how short people’s memories are.

“Prior to COVID, one narrative occupying our imaginations was the rise of automation,” he said in a blog post recently.

“The ‘jobs for machines, life for people’ narrative had become so concerning to some it inspired talk of a universal basic wage.”

And since that talk interest rates had sunk even lower, triggering “a near-vertical acceleration in IT spending” everywhere.

So for Montgomery the current inflation worries are temporary. The pre-COVID disinflationary forces still persist and will return after the virus has been dealt with.

“It is important for investors to remember the long-term narrative,” he said.

“Inflation will bounce around in the short and even medium term but structurally it appears to be heading interminably down. Lower inflation appears to be a structural reality.”

A ripe buying opportunity

The longer-term low inflation outlook means investors need to put their fears aside and grab the current buying opportunities.

“We’ve got a good list of probably 8 to 10 businesses that we’d love to own at the right price that are a lot closer to it today,” said Johnson.

“So if this goes on for a few more months, you can expect to see a few more new names in the Australian Fund portfolio.”

Montgomery agreed, saying there are now many decent stocks going for a tempting discount. 

“Historically, economic growth combined with disinflation is an ideal time to be in equities,” he said.

“Current and intermittent weakness in the share prices of high quality companies with bright long-term growth prospects should be seen as a classic contrarian opportunity.”

After vaccinations are rolled out and the pandemic is long forgotten, automation and digitisation of work will once again re-enter public discourse.

“We will return to debating a response to job losses from the rise of machines, AI and robots,” said Montgomery.

“And while the impact on wages and jobs will be negative, in the absence of any legislative or regulatory response, the marginal cost for business will decline and profits will rise.”

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Tony Yoo owns shares of AFTERPAY T FPO and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO and Xero. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO and Xero. 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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