Inflation on the rise, five sectors to watch out for

Highlights

• Annual consumer prices surged by 3.5% in December 2021 in Australia.
• Rising inflation impacts several sectors differently, with some actually benefitting from a price hike.
• The real estate market is not impacted immediately by changes in consumer prices.

Inflation has reached insurmountable levels in Australia, making things uncertain for an already battered economy. The inflationary pressures have heightened to a state where experts are predicting an earlier-than-expected rise in interest rates. The latest data from the Australian Bureau of Statistics (ABS) reveals that annual consumer prices rose by 3.5% in December 2021. Although, underlying inflation, which is the Reserve Bank’s preferred measure, stood at 2.6% in December.

Inflationary pressures have cast a shadow of uncertainty for investors, who intend to prevent their portfolios from inflationary pressures. Rising inflation is expected to impact several sectors differently, with some actually benefitting from a price hike. Here is a look at some sectors that are expected to face the impact of rising prices:

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Consumer staples

In the face of rising inflation, it is imperative for investors to understand how much pricing power a particular company holds. Consumer staples companies tend to pass on price rises to consumers in an inflationary scenario, as they hold greater pricing power.

Consumers often are willing to pay for staple goods despite increasing prices as such products are essential for their daily lifestyle. Thus, individuals find it hard to give up on consumer staples goods even as their prices rise. Investors looking to invest in companies for hedging against inflation can ponder on consumer staples entities. These companies continue to generate somewhat stable levels of revenue even in the face of adverse pricing conditions.

Construction and business capital goods

Not all sectors are poised to take down inflation with a solid punch. Experts believe that construction and business capital goods are volatile sectors and highly susceptible to losses in an inflationary environment.

Specifically, capital goods, which are largely dependent on inventories and warehousing, bear the brunt of delays in shipments. For instance, consider that inventory in a warehouse has been produced during low inflation. Thus, by the time these goods reach the markets in an inflationary scenario, price hikes eat away the real value of such goods.

Essentially, each additional dollar paid for these goods in the present day is valued less than each dollar used in their making. Thus, investors must carefully examine these sectors before investing in them during an inflationary period.

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Real estate

The performance of the real estate sector has been driven by a range of factors in the past two years, including record-low interest rates. Real estate is largely considered a hedge against inflation as it has less correlation with nominal markets. Unlike stocks and bonds, the real estate market is not impacted immediately by changes in consumer prices.

However, it is worth noting that Australia’s real estate sector is under significant price stress. Additionally, the fears of rising interest rates are mounting due to high inflation, which may create a crash-like scenario in the red-hot property market. Investors willing to beat inflation can ponder on Real Estate Investment Trusts (REITs) as they offer a diversified foray into the property sector.

Resources

The major rise in prices during the COVID-19 scenario has stemmed from rising commodity prices, primarily fuel and minerals. The global causal factor for the price rises in these sectors has been supply chain disruptions due to lockdown restrictions and border closures.

Notably, the futures market has strengthened on hopes that prices for minerals can rise further in the coming months. Meanwhile, Australia being a resource-rich nation, also expects higher export revenue. Thus, investors may keep a watch on commodity-linked stocks that are benefitting in a high inflation environment.

Consumer durables and luxury items

Unlike resources, consumer discretionary sector can be adversely affected during inflationary times as consumers usually delay their purchases for durable goods for a lower price. To the uninitiated, consumer discretionary goods are non-essential items that can be postponed for consumption.

Due to lower demand for consumer durables in an inflationary period, suppliers may be forced to offer goods at a lower rate, reducing profit margins for businesses. Thus, investors should be cautious while adding companies tied to these discretionary products in their portfolios. Proper technical and fundamental research seems imperative before taking any investment decision.

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