Preparing for inflation? This fund manager believes these shares offer protection

These 2 ASX shares make this fund manager’s list for fighting off inflation.

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Concerns about inflation and its potential impact on ASX shares has been a topical matter. Although Reserve Bank governor Philip Lowe insists increased prices on goods will normalise, some investors are wary of a future rise in interest rates. A situation that could put pressure on shares, especially those that are more growth orientated.

Given the economic climate, Sydney-based Perennial Partners has named two ASX shares that might offer a hedge against inflation.

Perennial’s picks for inflation-busting ASX shares

In its October monthly report, Perennial Partners reviewed its Value Australian Shares Trust. For investors, it was a month of underperformance when compared to its S&P/ASX 300 Accumulation Index benchmark. Specifically, the trust delivered a net loss of 0.3% for October.

While the fund manager’s overall view of the economy is positive, it notes 2 of the fund’s holdings as desirable inflation protection. Namely, the fund likes the added certainty these companies tend to provide through times of elevated uncertainty.

The ASX shares that Perennial Partners refers to are Newcrest Mining Ltd (ASX: NCM) and Northern Star Resources Ltd (ASX: NST). These 2 companies are the largest and second-largest listed gold mining companies on the Aussie market.

The fund manager’s selections align with the traditional notion that the value of gold rises when inflation rises. For this reason, it’s expected that gold miners would at least keep up with inflation as the price of gold rises.

With the Reserve Bank of Australia’s latest inflation rate printing out at 3%, investors might be starting to look at shares to combat this risk. Interestingly, the price of gold has barely increased 1% over the past year.

Patchy track record

Even though gold is a widely regarded inflationary hedge, the historical data supporting this is a little patchy. In a study of periods of above-average inflation, gold failed to provide a positive return during some high inflationary periods.

For instance, between 1980 and 1984, when inflation in the United States was around 6.5%, gold fell 10% in value. As a result, gold’s correlation with inflation over the past 100 years is relatively low.

In an article published by CNBC, portfolio strategist Amy Arnott said:

There’s no guarantee if there’s a spike in inflation, gold will also generate above-average returns.

The share prices of ASX gold miners Newcrest and Northern Star Resources have struggled in 2021. At the time of writing, these 2 companies have fallen 5.7% and 20% respectively year to date. This suggests these shares have failed to outpace inflation since the beginning of the year.

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Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. 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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