4 Best ASX Stock Sectors for Inflation

1. Energy

As inflation began sinking its teeth into the global economy in 2022, Ron Shamgar, head of Australian equities at TAMIM Management, said his firm increased its energy sector holdings. “(W)e have seen that during periods of high inflation this sector tends to do well,” he said, adding that the energy market has a perfect storm of drivers.

In the face of rising prices, consumers may put off upgrading their appliances or purchasing a new car, but they can’t go without heat in the winter or air conditioning in the summer. Companies may hold off on hiring, or taking out a loan to finance an expansion project. But they also can’t forgo their energy needs.

This bodes well for utilities companies and oil and gas stocks (primarily producers rather than explorers). Even though the clean energy transition is underway, oil and gas are expected to be an essential part of the global energy mix for years to come.

Encompassing the production, extraction and export of liquefied natural gas, liquefied petroleum gas, crude petroleum and condensate, Australia's oil and gas sector has long been a pillar of the country's economy. This sector has seen major growth over the last decade, with AU$473 billion invested. Australia contributes a small but important amount of these energy products to overall global supply, and is on track to become the world’s largest exporter of liquefied natural gas.

In her evaluation of the Australian market, Saxo Markets Australia market strategist Jessica Amir states that the country’s commodities and energy sectors present investment opportunities. The key players with the largest market share in Australia’s energy sector include: Chevron Australia, Woodside Energy Group (ASX:WPL,NYSE:WDS), Shell Energy Holdings Australia, ExxonMobil Australia, Santos (ASX:STO,OTC Pink:STOSF) and BHP (ASX:BHP,NYSE:BHP,LSE:BHP).

Exchange-traded funds (ETFs) may mitigate the risk of investing in individual stocks. ETFs focused on Australia’s oil and gas sector include the VanEck Vectors Australian Resources ETF (ASX:MVR), the SPDR S&P/ASX 200 Resource Fund (ASX:OZR) and the BetaShares Australian Resources Sector ETF (ASX:QRE).

Want to learn more about Australia’s energy investment opportunities? Check out these INN articles:

• Oil and Gas in Australia
• 5 Biggest ASX Oil and Gas Stocks
• Major Energy Projects in Australia

2. Consumer staples

Like energy producers, the big grocery store chains that provide everyday essentials consumers can’t do without perform well in an inflationary environment. Companies in this sector are able to pass their own rising costs of doing business along to consumers. Fast food restaurants and discount stores also benefit from rising prices as consumers look for more affordable alternatives. The consumer staples industry is segmented into food and beverages, household goods, personal care and apparel.

“Many consumer staples companies offer products that are often necessities even in bad economic conditions,” explains Shaun Pruitt, editor at Zacks Investment Research. “This gives consumer staples stocks hedging capabilities against inflation or events that might derail the broader market such as an economic slowdown or recession.”

In a 2022 report on consumer products, Deloitte Australia shares that “despite rising costs, at least half of companies surveyed expect their operating margins to increase. This coincides with an environment conducive to raising prices for end consumers.”

Major companies in Australia’s consumer staples industry include Woolworth’s Group (ASX:WOW,OTC Pink:WOLWF), Coles Group (ASX:COL,OTC Pink:CLEGF), Metcash (ASX:MTS,OTC Pink:MCSHF) and the A2 Milk Company (ASX:A2M,OTC Pink:APOCF). The ASX is also home to iShares Global Consumer Staples ETF (ASX:IXI), which tracks the S&P Global 1200 Consumer Staples Sector Index.

3. Materials

High inflation often leads investors to add materials to their portfolio as a hedge against inflation risk. Studies show that increasing your allocation to materials (commodities) as an inflation hedge can provide high returns.

Research by Vanguard, the world's largest issuer of mutual funds and the second largest issuer of ETFs, highlights that over the past 10 years commodities have risen by 7 to 9 percent for every 1 percent of unexpected inflation. To obtain exposure to the commodities markets, investors look to commodities-related stocks, futures, ETFs and indices.

As with the oil and gas industry, when it comes to stocks, it's the commodities producers that offer the best inflation hedges over more risky exploration stocks. Profitable major mining stocks producing commodities can benefit greatly from their rising value.

The mineral-rich nation of Australia has a long history as a top mining jurisdiction, and many of the valuable commodities produced contribute significantly to its economy. In fact, minerals account for up to 60 percent of the country’s export merchandise, according to Geosciences Australia, giving the mining industry a 12 percent share of gross domestic product.

The most profitable ASX-listed mining companies are focused on various commodities and include some of the world’s biggest miners, such as BHP, Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO), Mineral Resources (ASX:MIN,OTC Pink:MALRF), OZ Minerals (ASX:OZL,OTC Pink:OZMLF) and Fortescue Metals Group (ASX:FMG,OTCQX:FSUMF).

Both the VanEck Vectors Australian Resources ETF and the BetaShares Australian Resources Sector ETF, mentioned above, provide exposure to a wide range of Australia’s prominent commodity stocks. Additionally, there are a number of physically backed precious metals ETFs listed on the ASX, such as the ETFS Physical Gold (ASX:GOLD) and BetaShares Gold Bullion ETF (ASX:QAU).

Want to learn more about Australia’s commodities investment opportunities? Check out these INN articles:

• Investing in Resources in Australia
• Australia’s 5 Most Valuable Mineral Exports
• Major Resource Projects in Australia
• Where They Rank: Australian Mining Jurisdictions

4. Insurance

Insurance companies often invest their excess capital from underwriting in order to generate interest from the income. The higher interest rates that typically follow higher inflation increase that income, according to Forbes, boosting insurance stocks.

Australia’s insurance industry has three main segments: general insurance (vehicle, home, etc.), life insurance and health insurance. The market size of the general insurance industry alone is estimated at AU$80.3 billion for 2022, according to IBISWorld. The research firm projects that the general insurance industry in Australia will grow 2.6 percent per year on average between 2017 and 2022, increasing faster than the country’s economy overall.

Some of the best ASX-listed insurance stocks to check out include QBE Insurance Group (ASX:QBE,OTC Pink:QBEIF), NIB Holdings (ASX:NHF), Steadfast Group (ASX:SDF,OTC Pink:SFGLF), AUB Group (ASX:AUB) and Insurance Australia (ASX:IAG,OTC Pink:IAUGF).

Inflation can benefit Australian dividend stocks

Dividend stocks are another potentially lucrative inflation hedge. “(D)ividend stocks can offer crucial balance and additional income to a portfolio, especially in today’s environment of high inflation,” states Barron’s senior writer Lawrence C. Strauss.

Fortunately, for inventors interested in Australian markets, the ASX has a number of dividend stocks, a handful of which are laid out in INN’s 5 Top ASX Dividend Stocks article.