If you’ve visited the supermarket or the petrol station recently, you’ve no doubt been unpleasantly surprised by the massive rise in prices. Between the ongoing war in Ukraine, supply chain problems and a recovering global economy, it seems economies have been hit by the perfect storm for inflation. So how can investors benefit from these price rises?
The inflation genie escapes the bottle
After decades of benign inflation and falling interest rates, it’s safe to say that many consumers were not prepared for this year’s sudden and extreme price rises.
But it’s not just consumers who have been caught off guard. As recently as October 2021, RBA Governor Philip Lowe indicated that the RBA would not increase the cash rate until actual inflation is sustainably within the target 2 to 3 percent range, which was not expected to occur until 2024.1
Over the 12 months to 31 March 2022, consumer prices (as measure by the CPI) rose 5.1%.2 But this headline figure obscures the more extreme rises in some segments, particularly over the first quarter of 2022.
Source: Australian Bureau of Statistics, BetaShares.
There are a few stand-out groups, but for many consumers, it’s food and petrol prices that bite the hardest. In fact, these two groups make up 27.4% of the overall index, according to the latest weightings from the Australian Bureau of Statistics.3 The RBA even called this out as part of the reason for raising interest rates earlier this month.
It may not all be bad news for investors though. There are a few ways investors could seek to benefit from these rising prices. For example, BetaShares has two funds that provide investors with the opportunity to potentially profit from rising prices for groceries and petrol.
The BetaShares Global Energy Companies ETF – Currency Hedged (ASX: FUEL) offers access to a portfolio of the world’s largest energy companies, including ExxonMobil, Chevron and Shell. FUEL has returned 46.07% in the six months to 31 May 2022 as many countries scrambled to diversify their oil and gas supply away from Russia due to sanctions and other disruptions. As at 31 May 2022, FUEL has returned 9.55% p.a. over three years, and 6.87% p.a. over five years.
FUEL Index (net of fees and costs) vs Oil price
Source: Bloomberg, as at 31 May 2022. Past performance is not indicative of future performance of any index or ETF. Index performance is shown net of ETF fees and costs (FUEL’s management costs are 0.57% p.a.). You cannot invest directly in an index.
Even with increased demand for oil and geopolitical tensions, oil supply remains constrained. Historically, demand and prices have tended to remain strong, including during economic downturns.
The BetaShares Global Agriculture Companies ETF – Currency Hedged (ASX: FOOD) offers access to a portfolio of the world’s leading agriculture companies, including Nutrien, Archer-Daniels-Midland and Corteva. FOOD has returned 18.6% in the six months to 31 May 2022. FOOD has been topical for investors as Russia and Ukraine are leading exporters of wheat, grain, fertilisers, and other products like sunflower oil – all things which have been disrupted of late. As at 31 May 2022, FOOD has returned 17.5%% p.a. over three years, and 10.21% p.a. over five years.
FOOD vs US 10-year inflation expectations
Source: Bloomberg, as at 17 May 2022. Past performance is not indicative of future performance.
As can be seen from the graph above, historically there has been a strong relationship between FOOD’s index and inflation expectations. The war in Ukraine is placing further upward pressure on soft commodity prices. Ukraine and Russia traditionally account for around 25% of global grain exports. Meanwhile, India has restricted wheat exports to manage food security.
Nobody enjoys paying more at the bowser or the supermarket. But perhaps the knowledge that your investments have the potential to benefit from the higher prices might offer some consolation next time you’re forced to pay $2 per litre for petrol or $10 for a lettuce.
There are risks associated with an investment in FUEL or FOOD, including market risk, international investment risk, sector risk and concentration risk. For more information on the risks and other features of each fund, please see the applicable Product Disclosure Statement, available at www.betashares.com.au. A Target Market Determination for each fund is also available at www.betashares.com.au/target-market-determinations. An investment in FUEL or FOOD should only be considered as a component of a broader portfolio.
1. Reserve Bank of Australia. “Statement by Philip Lowe, Governor: Monetary Policy Decision.” 5 October 2021, https://www.rba.gov.au/media-releases/2021/mr-21-22.html.
2. Australian Bureau of Statistics. “Consumer Price Index, Australia.” 27 April 2022, https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release.
3. Australian Bureau of Statistics. “Annual weight update of the CPI and Living Cost Indexes.” 17 December 2021, https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/annual-weight-update-cpi-and-living-cost-indexes/latest-release.