Macquarie picks ASX 200 shares to buy in this volatile environment

Many ASX 200 shares are in the red today. But the market volatility may not be bad news for all.

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Key points

  • ASX 200 shares are coming under increasing pressure from rising inflation and interest rates
  • Macquarie warns that consumer discretionary and housing-related ASX shares could fare poorly in this environment
  • But there are a number of other six ASX 200 shares that will likely benefit from rising rates

Losses by S&P/ASX 200 Index (ASX: XJO) shares are deepening but this volatility may not be bad news for all, according to broker Macquarie Group Ltd (ASX: MQG).

The top 200 share benchmark is down by 1.1% in mid afternoon trade – taking its two-trading day loss to 3.2%. With some market watchers bracing for more losses, the sell-off may not be over yet.

There are several headwinds buffeting the ASX, but inflation is likely top of mind. This pushed the Reserve Bank of Australia to lift rates last week for the first time since November 2010!

Are ASX 200 shares worth buying as inflation bites?

Macquarie noted the inflation theme at its recent conference that saw 103 ASX companies presenting. The broker said:

Last year, one-quarter of companies talked about rising input costs. This year, most if not all companies talked about inflation.

Labour cost pressures appear to be a bigger issue this year, as labour markets are tight, skilled labour is hard to find and COVID continues to drive a higher level of absenteeism.

Profit margins could feel a further squeeze as wage increases are on the cards. This is despite migration recovering, albeit at a slow pace.

Reason to doubt confidence

The good news is that most companies are confident about their ability to pass on the higher costs. This is because the outlook for the Australian economy is still bright and jobs are aplenty. But sentiment could change as interest rates continue to rise. Said Macquarie:

The pool of savings accumulated during the pandemic was often seen as providing a buffer to support consumer spending despite the challenges from inflation and rising interest rates.

Investors tend to be more sceptical on the ability of companies to continue to pass on cost increases as policy tightening slows growth.

ASX 200 shares that could suffer

This is why the broker is wary about ASX consumer discretionary shares. These shares often fare poorly as rate hikes bite and the government's COVID-19 support fades.

Macquarie is also cautious about ASX 200 shares exposed to the housing market. We are already seeing early signs of weakness in the residential property market.

But not all ASX 200 shares will suffer as interest rates increase. In fact, the broker highlighted six ASX 200 shares that it believes are "beneficiaries of higher rates".

ASX 200 shares to buy as inflation rises

The Computershare Ltd (ASX: CPU) share price is one example. The international share services group generally gets an income boost when rates are rising.

Another inflation-protected example backed by Macquarie is the Transurban Group (ASX: TCL) share price. The toll road operator has contract-based pricing power when it comes to setting tolls.

Commodity producers don't usually have pricing power. But high metal prices that are bolstered by a positive outlook will help the likes of the South32 Ltd (ASX: S32) share price.

Then there's CSL Limited (ASX: CSL) and DEXUS Property Group (ASX: DXS). Both are considered by Macquarie to be COVID-recovery plays.

Finally, the broker picks the Amcor CDI (ASX: AMC) share price as another beneficiary due to its defensive earnings and reasonable valuation.

Motley Fool contributor Brendon Lau has positions in CSL Ltd., Macquarie Group Limited, and South32 Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL Ltd. The Motley Fool Australia has positions in and has recommended Amcor Limited. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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