Five ASX stocks that may safeguard portfolio amid rising inflation

Summary

  • Even as rising inflation can mean challenging times for equities, real estate and commodity-linked stocks have historically been seen as good bets during such times.
  • Inflation can mean continued profit for some defensive stocks.
  • Woolworths, CSL, and Goodman Group are a few stocks that can lure investors.

Amid expectations around a rise in inflation, US stock markets saw broad selling overnight. The weakness percolated to the Australian shares too as the equity benchmark ASX 200 traded in red on Wednesday.

A surge in inflation generally triggers interest rates to move upwards, resulting in risk assets losing their sheen as bond yields become firm. Higher bond yields make equities look less attractive as they reduce the lure of stocks' dividend payouts. Soaring yields also make debt servicing harder for firms.

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However, inflation can mean continued profit for some defensive stocks. Tangible assets, such as real estate and commodities, have historically been seen as inflation hedges. But we are not discussing about runaway inflation because it destroys value across the board.

There are also some specialised securities that can maintain a portfolio's buying power, including certain sector stocks, inflation-indexed bonds, and securitised debt. However, we will purely focus on stocks that can safeguard an investor’s portfolio during simmering inflation since investment decision works differently in case of debt and equities.

READ MORE: Five penny stocks outperforming the ASX 200

Here are 5 stocks to watch out for:

Woolworths Group Ltd (ASX:WOW)

The supermarket giant is among consumer stocks with increased appeal during inflationary conditions. Rising inflation results in higher producer inflation, leading to an increased pricing power with the manufacturing sector. Increased costs can be shifted to the consumers. With prices for corn, wheat and soyabean soaring, the company’s profitability is expected to rise further. In the last week of April, global brokerage Goldman Sachs gave a ‘buy’ rating to the stock. The stock price has surged nearly 2.5% YTD.

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Champion Iron Ltd (ASX:CIA)

Normally, commodities like metals, alloys, among others tend to benefit from higher inflation. The latest rise in the commodity (iron ore) price has significantly lifted the stock price. According to Macquarie, the valuation for the miner may jump by 450% if spot prices of iron hold. Investors can align their equity portfolio and even their mutual fund portfolio more with those lines. The stock price has surged nearly 50% so far this year. However, the company may not be able to pass on entire rise in input costs to the customers in case of higher-than-expected surge in inflation. So, investors need to be careful.

READ MORE: Six ASX Stocks To Watch As Copper Hits An All-Time-High

Telstra Corporation Ltd (ASX:TLS)

The telecommunications company has businesses that are unique assets and are the lowest-cost producer. The company gets an income stream from NBN, which is linked to inflation. The consumer business firm said on Monday that it was ‘on track’ to cover 75% of Australians with its 5G network by June 2021. The stock has given a return of nearly 14% in the last one year.

READ MORE: Five penny stocks outperforming the ASX 200

Goodman Group Ltd (ASX:GMG)

Property prices and rental income tend to rise when inflation rises. So, investors can realign their portfolio accordingly. So, a real estate stock such as Goodman Group can be a good bet. It has also been a major beneficiary of Australia’s shift to online shopping. Goodman is currently the largest property company on the ASX. The stock has given a return of 2.5% in the last one month alone.

CSL Ltd (ASX:CSL)

The healthcare could also be an attractive bet for investors. CSL has a strong intellectual property, which it can easily monetise. The global brokers expect the stock to do well for its plasma collection business as more people in the US are vaccinated against COVID-19 pandemic. In April, global brokerage Citi also rated the stock as ‘buy’. The stock has given a return of over 4% in the last one month.

READ MORE: Is 2021 going to be a sparkling year for aluminium?

Meanwhile, investors should look for restructuring their investment portfolio by including low-debt firms during inflationary times.

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