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As inflation continues to be a significant concern for ASX investors in late 2023, navigating the market to outperform inflation becomes a strategic challenge. Morgan Stanley (MS), a prominent ASX broker, offers insights into how investors can position themselves to counter the effects of rising prices.
Inflation's Impact on Different Companies:
While some investors might assume that investing in ASX shares alone is sufficient to counter inflation, MS highlights that inflation affects various companies differently. The report suggests that in an environment of persistent inflation and a resilient economy, the Federal Reserve may keep interest rates elevated, potentially impacting certain stocks.
According to Kevin Dermers of Morgan Stanley, stocks and funds providing exposure to "real assets" such as infrastructure, real estate, and natural resources become appealing in such economic conditions. Real assets are tangible assets whose value is linked to their physical attributes.
Why "Real Assets" are Key:
Morgan Stanley's report emphasizes three key reasons why "real assets" are crucial for beating inflation:
- Hedging Against Inflation: Real assets allow investors to consistently pass on rising costs to users, providing a hedge against inflation.
- Steady Income Streams: Real assets can deliver all-weather income streams, generating cash flow regardless of economic conditions.
- Diversification Benefits: Investing in real assets offers portfolio diversification benefits as their valuations are typically uncorrelated to other assets, including ASX shares.
Investing in Real Assets on the ASX:
While the report acknowledges the possibility for investors to hold real assets in their portfolios, it highlights the potential challenges and risks compared to traditional stocks or funds. Exchange-traded funds (ETFs) are suggested as a viable option for investors seeking exposure to real assets on the ASX.
Examples of ASX Options:
- Infrastructure: ETFs like Vanguard Global Infrastructure Index ETF (ASX:VBLD) and VanEck FTSE Global Infrastructure ETF (ASX:IFRA) provide exposure to companies operating infrastructure assets like pipelines, toll roads, and railroads.
- Property: Options include Vanguard Australian Property Securities Index ETF (ASX:VAP) and iShares Core FTSE Global Property ex-Australia ETF (ASX:GLPR), offering exposure to real estate investment trusts (REITs).
- Commodities and Natural Resources: BetaShares Australian Resources Sector ETF (ASX:QRE) provides exposure to major mining and energy companies, while investors can also consider commodity-specific ETFs like BetaShares Crude Oil Index ETF (ASX:OOO), Global X Copper Miners ETF (ASX:WIRE), VanEck Gold Miners ETF (ASX:GDX), and Global X Green Metal Miners ETF (ASX:GMTL) for diversified exposure.
- Agriculture: BetaShares Global Agricultural Companies ETF (ASX:FOOD) allows investors exposure to global shares involved in the production and distribution of food products.
Challenges in Commodities and Natural Resources:
While acknowledging the cyclical nature of commodities, MS argues that natural resources remain a viable option for investors aiming to beat inflation. Commodities like iron ore, oil, and precious metals have different market dynamics, but the overall natural resources sector is seen as a potential avenue for inflation-resistant investments.
As Morgan Stanley provides insights into navigating a high-inflation world, investors can consider these strategies to position themselves strategically in the current economic landscape. The recommendations highlight the importance of diversification and exposure to tangible assets to counter the impacts of inflation.
