Ah, inflation… It's certainly been the talk of the ASX town over 2022 thus far. The current Russia-Ukraine crisis is dominating the minds of most ASX investors right now. But it's inflation that's likely to remain the dominant investing theme of the year. That's why many ASX investors have been wondering how to make sure their ASX share portfolios are 'inflation proof'. Or at least as resistant as possible to the corrosive effects that rising prices can bring.
So let's check out what one ASX expert reckons is the best way to protect one's wealth against inflation. Intermede Investment Partners CEO Barry Dargan recently spoke to Livewire Markets about how to position an investment portfolio in an era of high inflation.
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Inflation is coming
Here's some of what he opened with:
The sort of companies we own are companies that have very strong pricing power and so if we do get into a situation where inflation becomes endemic, as may well be the case, these companies will be able to pass on inflation to either consumers or to their customers…
Many of the companies that we own are actually companies that don't charge anything for their product, so things like social media companies where essentially the people that pay them the money are B2B [business to business]… It's companies buying advertising on their space and you know, that sort of cost can definitely be passed on.
Mr Dargan says that the best kinds of these companies are ones with 'moats' around their business. A 'moat' is a Warren Buffett-coined term that describes a company's intrinsic qualities that protects it from threats. An example of a moat is a strong brand. Such as those that companies like Apple Inc (NASDAQ: AAPL) or the Coca-Cola Co (NYSE: KO) possess. Moats like a strong brand can help a company increase its prices to reflect inflation without losing customers. Or even, as Dargan suggests, do it without the customers noticing.
How does one invest in a high interest rate environment?
But Dargan also warns that central banks around the world may be "behind the curve" when it comes to inflation and interest rates. He is predicting that "we're probably in a slightly more inflationary environment than we were going back the last few years. By which I mean, probably something in the light, in the region of maybe two to 3% annual inflation". This will inevitably see higher interest rates, Dargan warns. Still, he doesn't reckon rates will be "going up to anything like historically high levels".
Going forward, Dargan reckons we will indeed see companies that could be described as 'value shares' doing well over the next few years. He points to banks, oil companies, and miners as some of the businesses that will benefit from a higher interest rate environment. But he also warns that these gains might be cyclical. As such, he argues that investors might do better by just focusing on the companies that "can pass on price and they continue to compound their earnings and grow reliably, annually each year".
Easier said than done, one could say! But that's how one ASX expert is thinking about inflation today.
