Two quality ASX 200 shares for an inflationary world: fundie

Inflation has been missing for years, but that scenario appears to be rapidly changing.

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The S&P/ASX 200 Index (ASX: XJO) is in the green today, up 0.37% in late afternoon trading.

October is, so far, proving to be a better month for Aussie blue-chips than last month, with the index up 1.6% since the closing bell on 30 September.

But, despite the turnaround, the ASX 200 remains down 2.3% from its 13 August highs.

Inflation returns…and may be sticking around

The ASX 200 witnessed late August and September falls of more than 5.8% before the market started to claw back some losses. It mirrored similar falls in most global indices.

There was no single cause for the widespread share price retreats. But investor fears that inflation may be back to stay, rather than be transitory as many economists had forecast, saw bond yields spike. And growth stocks like technology companies took some of the biggest hits.

Growth stocks are broadly more vulnerable to any sustained uptick in inflation. That’s because rising interest rates required to keep inflation in check mean the present cost of money goes up. And growth stocks tend to be valued on revenue streams that may be years in the making yet.

Now, the jury’s still out on just how high inflation may get across developed nations — and how long it may last. But more analysts are saying soaring energy and material costs and crimped supply lines make it increasingly likely inflation isn’t going back to where it was pre-COVID. Let alone the deflationary period in the early post pandemic months.

According to Maple-Brown Abbott chief investment officer Garth Rossle (quoted by the Australian Financial Review), “Raw material prices are up and energy prices are up too, so I just don’t think inflation’s going back to where it was.”

So, what’s an inflation wary ASX 200 investor to do?

Two ASX 200 shares for an inflationary world

Andrew Mitchell, senior portfolio manager at Ophir Asset Management, echoes Rossle’s outlook, saying, “I don’t think there is any question now that consumer price inflation in many advanced economies is going to more persistent than most expected.”

With inflation concerns in mind, Mitchell recommended ASX 200 investors consider stocks with lower valuations:

Equity markets can usually handle higher inflation and bond yields as long as it’s incrementally higher – it’s the big spikes that it tends to freak out on. Investors worried about persistent inflation damaging their portfolio returns should turn to stocks with low valuations that are less affected by rate rises and those with pricing power that can pass on those higher costs on to consumers.

Mitchell named Seven Group Holdings Ltd (ASX: SVW) and Elders Ltd (ASX: ELD) as two ASX 200 shares Ophir holds that he believes will outperform in an inflationary world.

As quoted by the AFR, he said:

In our small- and mid-cap space, some that fit that bill are Seven Group (the conglomerate driven by its Caterpillar equipment and Coates Hire exposures) and Elders, the ag services business with exposures across wool, grain, seeds and fertiliser… Both trade well below a market multiple and do well during a cyclical upswing in demand.

How have these ASX 200 shares been performing?

Over the past 12 months, the Seven Group share price is up 2.86%. Elders’ share price has gained around 2% in that same time while the ASX 200 has gained 21%.

At the current share prices, Elders pays a 2.9% dividend yield, 20% franked, while Seven Group pays a 2.2% dividend yield, fully franked.

Should you invest $1,000 in Elders right now?

Before you consider Elders, you'll want to hear this.

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*Returns as of August 16th 2021

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Elders 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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