Modify portfolios to take account of inflation

Investors are advised to take account of inflation, which despite “what government figures are telling us”, is already here and construct their portfolios for a high inflation environment.

Emanuel Datt, founder of boutique Australian equity investment firm Datt Capital, said  inflation should be viewed not as ‘coming’ but ‘already on the ground’.

“In practical terms, we've seen broad price rises in almost every aspect of everyday life across the board over the past 12 months.

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“We ourselves have noticed large price increases in an array of services such as Uber fares, home food delivery prices and the cost of skilled blue-collar services like plumbing. We have also observed that hardware wholesalers have recently at times experienced shortages of basic items such as timber,” he said.

In terms of asset classes, considered as the best places for a high inflation environment, Datt advised investors to look at real assets, in particular, hard commodities such as precious and base metals, soft commodities like agricultural products and produce,  real estate and listed equities.

Following this, investors should also consider companies experiencing sustainable organic growth which were often attractive in this environment, as typically growth multiples contracted in line with inflation allowing investors with a longer time horizon to benefit from purchasing these assets at lower, out-of-cycle valuations.

“We anticipated that inflation would come about in early 2021 due to the COVID related shutdowns and subsequent enormous government stimulus programs enacted worldwide.

We increased our exposure at this time to maximise our exposure to real assets largely via commodities which we felt were materially undervalued at the time and would be subject to the most upside over a medium-term range,” Datt added.

“Offshore precious and base metals play Adriatic Metals (ASX:ADT) is an example in our portfolio of both an investment focused on commodities and a value proposition given its assets and outlook, although it is not necessarily widely appreciated by the local market given its Balkans focus. The ongoing rise of Oz Minerals - not in our portfolio - is one of many examples of this commodities thematic as is, of course, BHP, Rio and Fortescue.

“A high inflation environment also affects various assets negatively. We would avoid fast moving consumer goods (FMCG) and direct-to-consumer (DTC) technology companies and fixed income investments.”

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