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With the latest inflation figures coming in higher than expected this week, the RBA has warned that it does not foresee any rate cuts until the end of 2024.
This is unwelcome news for those Australians struggling with the rising cost of living.
With no immediate relief from the RBA in sight, it might be time for Australians to shift their mindset and explore ways they might be able to benefit from the inflationary environment.
Conventional wisdom suggests that you should invest in stocks in the financial, materials or energy sectors during inflationary periods.
However, while these sectors have historically performed well during times of inflation, both the energy and materials sectors experienced significant declines in 2011 and 2014, which were the previous two times that CPI was at, or above, the 3 per cent threshold. Financials also saw a decline in 2011 but improved in 2014.
Given the traditional sectors might not be the best investment during inflation, where should you look?
The key is to identify companies that directly benefit from rising interest rates.
One such company could be Computershare (ASX:CPU), which holds around $25 billion in cash on behalf of clients. This means that every 1 per cent increase in the interest rate translates to an additional $250 million in earnings for Computershare.
Historically, each time the RBA has begun to raise rates, as it did in 2009, CPU’s share price found a long-term low and then rose strongly. With the potential for rates to increase, CPU is a company worth consideration to combat inflation.
Another company to consider is EML Payments (ASX:EML) which holds $2 billion in customer funds, so every 1 per cent rise in interest rates generates an additional $20 million in earnings. Like CPU, EML’s share price has increased with interest rate changes. For example, EML’s share price reached its all-time low just before interest rates started to rise in 2009, with the stock soaring over 33,000 per cent to its all-time high in 2021.
Since peaking, the share price has fallen more than 90 per cent, coinciding with a period of falling interest rates.
However, the share price has been rising again since October 2022, which is intriguing because the RBA started raising rates in June 2022 after years of consistent rate cuts.
So, if the RBA continues to raise rates, EML could present a rare opportunity to pick up a stock with huge upside potential.
Best and worst performing sectors this week
The best-performing sectors include Real Estate – up just under half a per cent – followed by Communication Services and Consumer Discretionary, which were down just under half a per cent. The worst-performing sectors include Utilities, which shed more than three per cent, followed by Energy and Materials, down over two per cent.
The best-performing stocks in the ASX top 100 include NIB Holdings (ASX:NHF), which gained more than four per cent, followed by Pro Medicus (ASX:PME) and Domino’s Pizza Enterprises (ASX:DMP), both up over three per cent. The worst-performing stocks include Fortescue (ASX:FMG), down more than seven per cent, followed by Liontown Resources (ASX:LTR), down over six per cent, and Iluka Resources (ASX:ILU), down more than five per cent.
What’s next for the ASX?
Sellers have taken control this week, with the All-Ordinaries index dropping more than one per cent. Interestingly, the market is now back at the crucial 7,900-point level. This level has proven to be a strong support level on three separate occasions this year, where the buyers have stepped in to prevent further declines leading to a gain of around 3 per cent each time the market dipped.
What’s exciting is that with prices at the 7,900-point level, we are at an inflection point in the market with a clear scenario ahead. If buyers remain consistent, we should soon see prices begin to rise from this level, potentially pushing the market back up to test the previous all-time high of 8,167 points.
However, if the 7,900 support level fails, it will introduce a new dynamic we haven’t seen this year, offering insight into what may happen in June.
In my previous report, I mentioned the possibility of the market hitting a mid-year low in June. This week has increased that likelihood, especially since June is historically a down month for the All Ordinaries Index. For the market to confirm a mid-year low in June, it would need to break below the April low of 7,743 points.
A decline in June would also offer traders and investors, who thought they had missed the mid-year buying opportunity, a renewed chance to enter the market. This is exciting news, as this opportunity seemed unlikely two weeks ago, and the outlook is now clearer than it has been for some weeks.
Therefore, I encourage investors to be prepared to act at the first sign of confirmation.
For now, good luck and good trading.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au
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