- Insight Article posted on March 11th, 2022 5:16:22 PM by
Overview: While inflation has been a big topic for investment markets for the better half of 12 months, most Australian’s haven’t really felt it locally through their daily living costs…until now.
While inflation has been a big topic for investment markets for the better half of 12 months, most Australian’s haven’t really felt it locally through their daily living costs…until now. In fact, over the last quarter, we’ve started to really feel it our hip pockets. Whether it be the cost of no brand tissues at Coles and Woolies or the cost of cooking oil; prices have slowly crept up without notice. So, what’s all the fuss about and how does that relate to investments?
Ultimately, the key is the future direction of interest rates. With US inflation now reading above 7% in January, the US Federal Reserve has signalled potential aggressive rate rises throughout the 2022 calendar year. This has recently been slightly muted due to the ongoing humanitarian crisis in Ukraine but nonetheless inflationary pressures are still there.
The same can be said in Australia with rates expected to also increase as inflation is above the RBAs target range of 2-3%. The key question in terms of investment opportunity is to consider the types of funds which will be able to absorb inflation pressures, vis a vis share funds and their underlying companies. Are they a price taker or price maker? If they are a price maker, they can simply push the increase in cost down to the consumer with little material impact to revenues. If they are a price taker, margins and therefore profits will take a hit.
Furthermore, the speed of interest rate rises is also critical and a fine balance needs to be struck. Raise rates too quickly and you’ll choke off growth, raise rates too slowly and you risk inflation really getting out of hand.
The investment committee is monitoring the progress of these rate rises and its underlying impacts on portfolio constituents. Time will only tell if central banks achieve the right balance, but for the time being, expect consistent volatility in equity markets.
