ASX a good bet as panic selling grips markets

There are now few places to hide for investors as inflation and higher rates start to bite, but Australia’s sharemarket may offer some reprieve.

As panic selling sends global markets tumbling, experts say Australia’s sharemarket could outperforme and offer investors some reprieve. Picture: Spencer Platt / Getty Images / AFP

Panic selling across the globe this week has investors confronting a stark reality: there are now very few places to hide as inflation and higher rates bite.

But there is some good news.

With experts split on whether we’re staring down the barrel of a recession or if central banks can somehow engineer a soft landing, the Australian sharemarket is tipped to outperform.

“We’d say hide in Australia,” Crestone Wealth Management head of equities Todd Hoare told The Weekend Australian.

“From an equity perspective, Australia looks like a safer place to be. It is lower beta (that is, less volatile), valuations are optically more attractive, we’re a resource-led economy, and even though inflation is proving a bit stickier, we shouldn’t get the same level of entrenched inflation seen elsewhere in the world.”

But equity-heavy investors should be looking to diversify, he cautioned.

“It comes down to multi assets, with bonds offering a little bit more value than what they have done for a long period of time, and alternative asset classes in the mix,” he said.

“Even cash to some degree, even though in real terms inflation is eroding that. With very few places to hide right now, all you can do is try to lose less.”

For investors seeking some protection from the storm, gold is often pointed to as a useful inflation hedge. Indeed, investors have been piling into gold ETFs in a bid to shield themselves from the impact of spiralling consumer prices.

The gold price in US dollar terms – around $US1830 – hasn’t done much over the past year, aside from a brief spike when Russia invaded Ukraine. But it has avoided the walloping seen in other asset classes.

‘Remarkable’: Gold has managed to hold its value in the face of the stronger US dollar and higher interest rates. Picture David Gray / Bloomberg

The fact that gold has held its value shows that it is performing as it should, according to financial adviser Doug Turek of Minchin Moore Private Wealth Investors.

“It’s actually quite remarkable that gold has held up when the US dollar and interest rates have strengthened,” Mr Turek said.

“We would have expected gold to go down in value. The case for gold has weakened dramatically but the fact that it’s held its value is a sign that it’s working.”

Indeed, local investors – retail and institutional – have continued scooping up the yellow metal through ASX-listed exchange-traded funds such as ETF Securities’ Physical Gold ETF (GOLD), which has seen net inflows of $180m in the year to date, including $60m in March, $40m in April, and $30m in May.

The $180m in inflows is nearly double the $100m it recorded over the same period last year.

But BetaShares chief economist David Bassanese cautions on gold’s outlook, warning that an aggressive US Federal Reserve, which this week lifted the federal funds rate by 75 basis points to 1.75 per cent, will be a persistent headwind.

“Gold has done better than bonds of late but it hasn’t done great,” Mr Bassanese said.

“Yes, inflation has picked up but central banks are trying hard to contain it, so gold isn’t benefiting (from the higher inflation).”

Gold is not the only asset that can offer a degree of protection against inflation.

For equities, in times of high inflation, energy, resources and agriculture stocks are typically seen as relative safe havens, according to Mr Turek.

But this time around, the surge in asset prices post the 2020 market crash complicated the picture, he warned.

“All those assets that might work better than others in times of inflation could be very pricey now,” he said.

“Rushing after them at this stage might not be the right move.

“The good news is inflation is a very bumpy road. You can have high inflation for a time and then you have a low reading. Then you’re back up with a high reading. It tends to hang around, meaning you might get a second chance to, say, buy commodities at a later point.”

Indeed, after big declines this week, which pushed the US S&P 500 into a bear market and the S&P/ASX 200 into correction territory, stocks appear to be coming back to fair value.

For Crestone’s Mr Hoare, consumer staples, energy companies and defensives, including healthcare, are good options when inflation is running hot.

Investors looking to broaden their commodity exposures may look to ETFs, which offer easy access to multiple listed companies.

BetaShares’ Australian Resources Sector ETF (QRE), which includes holdings such as BHP, Santos and Newcrest Mining, hit $140m in funds under management in April, up from $96m at the start of the year.

For investors looking further afield, the BetaShares Global Agriculture ETF (FOOD) has been popular since the start of the year.

Agriculture ETFs have been popular since the outbreak of the Ukraine war. Picture: Andy Rogers / News Corp

The fund recently passed $150m after recording a jump of more than 100 per cent in funds under management since the onset of the Russia-Ukraine conflict in February.

Another option for investors is to seek out low-volatility companies to smooth the performance in times of turbulence.

ETF Securities’ S&P 500 High Yield Low Volatility ETF (ZYUS) offers investors exposure to US equity yield through 50 low-volatility, high dividend-paying stocks from the S&P 500 index.

Fixed income has also become more attractive as rates push higher. For the first time in a long time, institutional investors are starting to see fresh appeal in bonds.

Two-year term deposits, meanwhile, now have rates sitting above 3 per cent. Yes, inflation is running hotter than that, but it still provides a degree of certainty and a chance to “lose less” in a volatile market.

Inflation-linked bonds, which are bonds indexed to inflation, are also worth a look, Mr Turek said.

“I’m a fan of inflation-linked bonds. They appreciate in value according to the rate of inflation, which is terrific,” he said.

The only caveat, he added, was “the price you pay for them”. Even after the big market declines this week, in the short term at least, some of these asset classes may not be a good pay-off, he said.

“Central banks making money free created a bubble of everything, and the better hedges for inflation got caught up in that,” he said. “The residential home, that’s a long-term inflation hedge. Inflation-linked bonds, the commodity stocks, all of them are true inflationary hedges over the next decade. But they boomed so much in the previous year or two that in the short term at least they could be a bad investment.”