Insights

Inflation? The tough choice facing all ASX investors right now…

Will inflation come sooner than we think? The answer can affect your ASX share portfolio
The post Inflation? The tough choice facing all ASX investors right now… appeared first on The Motley Fool Australia. –

At the present time, there are two possibilities ASX investors are facing when it comes to the future. Believing interest rates will rise in the short-to-medium future. Or believing that rates will stay ‘lower for longer’.

The periodic volatility the S&P/ASX 200 Index (ASX: XJO), as well as the US markets, have gone through so far this year has pretty much centred around which of these two camps has the upper hand in investing sentiment. Back in March, ASX tech shares went through a very rough period of volatility. This correlated with the US government bond yield on 10-year Treasuries rising substantially – a market reaction normally attributed to increased inflation expectations.

As this 10-year yield has fallen over the following months, the ASX 200 has pushed to new record highs.

Now, both the US Federal Reserve and the Reserve Bank of Australia (RBA) have been very clear on their future expectations when it comes to inflation and interest rates. Both have flagged that they are prepared to see inflation ‘run hot’ and consistently hit 2-3% annually before raising rates. Both have stated that they would like to see full employment as well. And both have told their respective countries not to expect any rate hikes until 2023 or 2024.

Inflation shadows the ASX

The US Fed changed the goalposts slightly last week when it came out and said that it might have to deliver two rate hikes in 2023. However, Fed chair Jerome Powell has since come out and tempered this assessment, stating that he expects recent rises in inflation to be “transitory”.

However, there are still are numbers of investors out there who think that inflation is still coming, and fast. We discussed how one fund manager is preparing for inflation just yesterday. So who do we believe? The central banks, or the inflation bears? Unfortunately for ASX investors, each side offers a wildly divergent outcome and will affect an ASX share portfolio differently.

Put simply, if rates rise, it’s likely to bring bad news for investors. Especially if the Fed and the RBA have to raise rates quickly. Since interest rates affect the returns offered by government bonds and cash investments, rising rates usually result in capital leaving the share market and going into these ‘safer’ investments. Higher rates theoretically also raise the risk of investing in companies that have a lot of debt, such as growth shares. If interest rates are at record lows, borrowing money to grow a company is very cheap. If rates rise, not so much.

Right and wrong

So if the lower for longer’ camp is right about rates, and we don’t see a rate hike until 2024, then there is a lot less risk in investing in shares in the current market. If the ‘inflation is coming/already here’ camp is right, we might be in for a choppy year or two for returns on the ASX. So it might be worth taking a look at your ASX portfolio and envisage how it might fare if either of these two narratives plays out. Remember, one camp will probably end up being right, and one wrong.

The post Inflation? The tough choice facing all ASX investors right now… appeared first on The Motley Fool Australia.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of May 24th 2021

More reading

2 ASX shares with IPOs that have delivered market-beating returns

These ASX 200 shares are on the move today

The top performing ASX 200 mining shares of 2021

Here are the best performing ASX 200 tech shares so far in 2021

ASX 200 up 1.3%: Soul Patts-Milton merger, IGO jumps

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;


To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.


An active and funded account with a positive trading balance is required to continue to have access to the tools;


Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;


Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!