The higher inflation narrative caught up with global markets in January this year. Australian 10-year bond yields climbed from 1.5% to 2.0% over the month, one of the fastest sell-offs seen in over three decades. Australian equities struggled against this regime change, with equities falling -6% in the month.
Inflation is driving a regime change, forcing central banks to quickly pivot from almost unlimited monetary accommodation to a faster pathway of rate normalisation. Complicating the task of assessing just how persistent higher inflation will be are the ongoing distortions from COVID-19.
For Australian equities, the prospect of higher inflation is mixed. Half of the market (in market cap terms) is likely to see improved earnings as a response to higher inflation - energy, materials, financials. For the remainder of the market, the earnings outcomes are less certain with the balance between higher revenues and costs often lagging and exposing earnings holes.
We look at some of the ways investors can position for the prospect of higher inflation (and interest rates) and explore some of the inflation beneficiaries.
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Written by
John Lockton, Australian Equities
John is a leading investment strategist with 20 years experience.