Safeguarding against inflation: A defensive share strategy

Investing in defensive shares can shield your portfolio from inflation.

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Australia's inflation rate has experienced notable fluctuations over the last couple of years. It has been significantly influenced by global disruptions such as the COVID-19 pandemic and geopolitical tensions. These factors, coupled with supply chain constraints and rising commodity prices, have escalated costs across various sectors. This poses a challenge for investors looking to maintain the real value of their portfolio returns.

Impact of inflation on real returns

Inflation erodes the purchasing power of money, directly impacting the real returns of investments. For investors in the stock market, this means that nominal gains can be offset by the rising cost of living, leading to diminished actual wealth accumulation. This underscores the importance of strategic investment choices that can outpace inflation and preserve capital.

Defensive share investment strategies

In response to inflationary pressures, one strategy is to focus on defensive stocks in sectors less sensitive to economic cycles. Think consumer staples and utilities. These sectors are considered defensive because they provide essential goods or services that remain in demand, regardless of economic conditions.

Companies like Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) play a critical role in everyday life by providing necessary goods. Despite economic downturns, demand for products from these companies tends to remain stable, making them resilient investment choices during inflationary times. 

Coles reported robust results for 3QFY24. Supermarket sales revenue was up 5.1% to $9,065 million. Woolworths has also demonstrated strong financial performance recently, with group sales up 2.8% over the same period to $16,800 million. Despite these results, both companies' share prices fell on the day of the quarterly updates.

Both supermarkets have seen their earnings increase year on year since 2020, but their share prices have been heading in the opposite direction. The Coles share price is down 10% over the past year while the Woolworths share price is down 17%. Both companies, however, have the potential to bounce back speedily following corrections in the share price which could serve savvy investors well.

Utilities are another pillar of defensive investing. Companies like AGL Energy Limited (ASX: AGL) supply essential services like electricity and gas. Utilities are indispensable, which can provide a buffer against economic swings. AGL recently raised its earnings guidance for FY24, with net profit after tax (NPAT) expected to be between $760 million and $810 million, up from $680 million and $780 million. 

The AGL share price is down 14% from its peak in July 2023 but has been trending upwards since February 2024, when it announced a quadrupling of interim profit.

Foolish takeaway

Investing in defensive stocks, such as those in the consumer staples and utilities sectors, can present a prudent approach to safeguarding your portfolio against inflation. These sectors offer the dual benefits of stability and consistent demand, which are crucial during times of economic uncertainty and rising prices.

By strategically incorporating such stocks, investors can protect their portfolios and possibly achieve real growth in value. This makes defensive share strategies essential to a well-rounded investment approach during inflationary periods.

Motley Fool contributor Katherine O'Brien 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 positions in and has recommended Coles Group. 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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