Will inflation pressure your ASX shares in 2022? Here are Bell Asset’s strategy tips

Most economists now believe today’s inflation isn’t quite as “transitory” as hoped.

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ASX shares have broadly had a great run over the past 12 months. The All Ordinaries Index (ASX: XAO), for example, is up a whopping 25% since this time last year.

ASX tech shares have managed to hold their own as well. The S&P/ASX All Technology Index (ASX: XTX) is up 23% over the past 12 months.

Many listed companies have benefited from ultra-low interest rates. Not only does this bring down their borrowing costs, but it also makes ASX shares more attractive relative to low-yielding bonds or cash deposit accounts. Meaning more investors tend to put money into the share market.

But with sticky higher inflation now flashing red on investors’ radars, what’s the outlook for the year ahead?

Not so ‘transitory’ inflation

According to Ned Bell, the chief investment officer at Bell Asset Management, investors’ interest rate expectations should broadly direct markets in the year ahead.

Presenting at yesterday’s ‘Bell Asset Management — Global equities market update and outlook for 2022’ webinar, Bell pointed to US Federal Reserve chairman, Jerome Powell’s change of words on the durability of recent price spikes.

“Powell was using the word transitory with great effect a couple of months ago. But essentially it’s disappeared from the vocabulary,” Bell said.

And wage inflation could be among the more durable price increases impacting global companies and ASX shares.

According to Bell:

You’ve got much higher oil prices and commodity inflation, that’s obviously causing some issues. And it remains to be seen how long this will be an issue. But on the other side of the coin, you’ve got wage inflation. The wage inflation is becoming more of an issue, and we feel like that is going to be with us for some time.

One of the most common things we keep hearing from companies is that staff availability is a real problem. One of the side effects of COVID is that a lot of people simply don’t want to go back to work. They’re rethinking their lives and willingness to work. That’s causing some real labour constraints, across multiple jobs and multiple industries.

Strategies for ASX shares and global markets

With higher energy costs and potentially increased wage costs, some ASX shares are likely to do better than others.

“Clearly things like energy” have outperformed this year, Bell said. “Some of the actual causes of the inflation are good places to be.”

What else should investors consider in an inflationary environment?

According to Bell:

From a style perspective, quality companies that have pricing power. They can pass on those commodity price increases. Those are the ones that are going to benefit over and above the ones that can’t…

Services businesses, like a software company or a consulting business, they don’t have any input price pressure. Those types of businesses, and the less capital intensive businesses, tend to do better during inflationary periods.

Generally, lower margin businesses are the ones that are really going to struggle. You’re seeing some of the consumer staples companies starting to feel the effects of that. Things like packaging but also food prices are ticking higher.

Higher inflation equates to higher interest rates

As noted above, many ASX shares have benefited from ultra-low interest rates. But the days of record-low rates may be ending sooner than expected. And that could throw up some unwanted headwinds for certain ASX shares.

Bell explained:

That tends to be trouble for the most expensive stocks in the market. As night follows day, when interest rates go up, high P/E [price to earnings ratio] stocks go down. We’re seeing that now … That will arguably trigger a bit more of a rotation out of the most crowded growth names into the rest of the market.

Now it’s not as binary as sell the highest growth stocks and buy the cheapest, junkiest. It’s about having more diversification.

So, investors worried about inflation may want to run the slide rule over their ASX shares and make sure they don’t hold too many in any single basket.

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 no position in any of the stocks mentioned. 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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