In 2021, and especially in the latter part of this year, much of the talk of the ASX town has revolved around inflation, and by extension, interest rates.
Inflation hasn’t been a pressing problem for Australian policymakers or the Reserve Bank of Australia (RBA) for decades now. But resurgent inflation across many of the advanced economies of the world in recent months has certainly raised some eyebrows.
This is highly relevant for investors because rising inflation, and the higher interest rates that normally accompany it, can have big consequences for any investor’s investment portfolio.
If you weren’t aware, inflation is the phenomenon where the intrinsic value of money decreases over time. It means you will need more nominal currency to buy a good or service than you used to. It’s the reason why your grandparents talked about 5 cent loaves of bread, yet that same bread costs $5 today instead.
Normally, governments welcome a little bit of inflation because it helps stimulate a healthy economy. That’s why the RBA has an inflation “target band” of between 2% and 3%. But too much can cause economic distortions across the economy and is almost universally regarded as undesirable. And that’s why the RBA tends to raise interest rates if it believes inflation is getting ahead of itself.
So how does one position an ASX share portfolio for a world of rising interest rates?
Fundie: Why NAB shares are a good pick for a higher-rate world
Paul Xiradis, chief investment officer and executive chair at fund manager Ausbil, has a few ideas.
Xiradis is confident we will see higher interest rates in the near future. He says that even if they remain below historical levels, “they are likely to be higher than their COVID lows”.
He went on to state “it’s not unreasonable for rates to start to rise and normalise” from here.
In this scenario, Xiradis singles out “the major banks” as worthy investments in this environment. And he “specifically” likes Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB). Why? Xiradis says ASX banks such as CBA and NAB “benefit in positive economic growth conditions when rates are firming” and they have “strong capital positions”.
Xiradis isn’t NAB’s only fan though. As my Fool colleague James covered earlier today, investment bank and broker Goldman Sachs is also bullish on NAB shares.
Goldman has a ‘conviction buy’ rating on NAB right now, with a 12-month share price target of $31.15 (implying a near-10% upside over the next year). Goldman likes NAB for its dominance in the business banking space, which it views as more lucrative than residential mortgages right now.