The rate of inflation in Australia continues to be stronger than what the Reserve Bank of Australia (RBA) would like, which may have a negative knock-on effect on ASX shares. The latest monthly reading showed that inflation had accelerated back to 4%, which was stronger than expected.
The RBA's job is to ensure that inflation stays under control, and recent inflation strength is increasing the risk of another rate rise.
A rate rise would be painful for borrowers and give households with big cash deposits another boost to their income.
What would the impact on ASX shares be? The broker Morgan Stanley has given a warning about which stocks could underperform.
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Household-facing ASX shares could face troubles
According to reporting by The Australian, Morgan Stanley suggests that ASX bank shares, ASX retail shares, and ASX housing shares face the potential of underperformance, with the institution predicting an interest rate increase by the RBA in August.
There are numerous banks on the ASX including Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), ANZ Group Holdings Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Bendigo and Adelaide Bank Ltd (ASX: BEN) and Bank of Queensland Ltd (ASX: BOQ).
Housing ASX shares could include Mirvac Group (ASX: MGR), Stockland Corporation Ltd (ASX: SGP) and Brickworks Limited (ASX: BKW).
I recently covered the outlook for ASX retail shares in a separate article, though names like Harvey Norman Holdings Limited (ASX: HVN) could certainly come under scrutiny if Australian rates increased.
Morgan Stanley suggested that if the RBA makes another rate hike and also gives 'hawkish' commentary, it could mean weakness for the local economy. This could lead to consumers being more thrifty with their money, which could challenge second-half earnings.
The newspaper reported that the broker suggested the market's optimistic approach to credit quality risks is shown by the valuations that ASX bank shares are currently trading at, and those multiples should be reconsidered. It also said that some indicators for housing activity are continuing "to flash". The Australian dollar could strengthen if the RBA rate goes up because investors would be able to earn more money in the country.
What stocks would be opportunities?
Morgan Stanley Australia equity strategist Chris Nicol said, according to The Australian:
For much of this year we have seen a consensus bias to want to look through any impact from tighter monetary policy and jump any earnings gaps to the next stage of the cycle.
Should our additional rate hike call become consensus, the potential harder landing that comes with that is not priced into earnings multiples in our view and will pressure Index direction.
In terms of positioning, we retain our model portfolio sector bias of underweight banks, consumer and housing-linked stocks.
Our key overweight sectors are resources, non-bank financials, global healthcare and selected quality growth.
No specific ASX shares were mentioned as opportunities, but global healthcare could include names like Cochlear Ltd (ASX: COH), CSL Ltd (ASX: CSL) and Sonic Healthcare Ltd (ASX: SHL). Non-bank financials may refer to names like Insurance Australia Group Ltd (ASX: IAG) and Challenger Ltd (ASX: CGF) that could benefit from higher interest earnings on their bond investments.
