The S&P/ASX 200 Index (ASX: XJO) tumbled in January due to fears of rising interest rates.
After a mini-revival to start February, the index has again headed down as the Russian military started a war in Ukraine.
However, the primary force that's putting downward pressure on ASX shares is actually the same as a month ago.
It's all about inflation.
The fear in January was that inflation arising from COVID-19 issues such as supply chain and economic recovery would become persistent.
This time a war involving Russia and Ukraine could result in a surge in prices for anything from gas, oil, wheat and corn.
And of course, rising and persistent inflation will result in higher interest rates.
"Forward-looking rate markets are now starting to factor in much higher rates," read the Inflation Beneficiaries: What is Currently Priced In? memo from Wilsons.
"The pivot from the [US] Federal Reserve in January 2022 and the RBA earlier this month has only heightened the markets' expectations of rate increases."
In this report, the analysts at Wilsons examined which ASX shares might fare the best in such an environment:
40% boost if interest rates rise one percent
Wilsons reported that "cyclical sectors" typically outperform during times of rising interest rates.
"The performance so far in this cycle looks very similar to what we have seen in prior cycles."
Stock transfer provider Computershare Limited (ASX: CPU) is a direct beneficiary of any rate rises.
This is because the company holds investors' unclaimed dividends as a cash balance that's invested.
According to management, incredibly, a 1 percentage point increase in interest rates will result in a 40% boost to Computershare's profitability.
"Interest earning cash balances CPU holds across key business lines are expected to average ~$40 billion this half.
"The recent acquisition of the Wells Fargo Corporate Trust has doubled Computershare's exposure to interest rates."
Insurance is a lovely business in 2022
QBE Insurance Group Ltd (ASX: QBE) is another stock that Wilsons analysts would target.
"Insurance companies typically provide outperformance opportunities in periods of rising inflation/interest rates," the report read.
"They benefit from higher premiums due to the rising inflation environment and higher interest income on policyholders' funds."
While QBE itself hasn't indicated how much it would benefit from rising rates, the Wilsons team made its own calculations.
"We estimate QBE would see a benefit of 10-20% to earnings if rates were to rise by 1.0%," stated the report.
"This assumes that higher premiums are not offset by higher claims inflation; the capital base is unchanged while profit margins expand marginally."
Similarly, Wilsons saw Insurance Australia Group Ltd (ASX: IAG) as a beneficiary, but not as convincing as QBE.
"We see IAG as offering mild positive exposure to higher inflation/interest rates. Premium growth of 6.2% in 1H22 reflects IAG pricing power in a duopoly market," the report read.
"So far, higher claim costs are not enough to detract from the premium benefits."
How would a payments company benefit?
One stock that might be so obvious as a rate-rise beneficiary is payments company EML Payments Ltd (ASX: EML).
"As a payments business, EML earns a return on client funds held in its accounts," read the Wilsons report.
"The guidance provided by EML equates to a 15% to 20% uplift in earnings for a +1.0% move in rates."
This possible boost is not reflected in financial year 2023 market estimates, according to Wilsons analysts.
"If rates move through 2%, the leverage becomes even greater given EML's rate structures in the US," stated the memo.
"With rate rises already in place in the UK, and all but given in the US, higher rates should assist in EML meeting guidance."
