With the latest inflation figures coming in higher than expected this week, the RBA has warned that it does not foresee any rate cuts until the end of 2025. This is unwelcome news for Australians struggling with the rising cost of living writes Wealth Within chief analyst Dale Gillham.
With no immediate relief from the RBA in sight, it might be time for Australians to shift their mindset and explore ways to benefit from the inflationary environment.
Conventional wisdom suggests that you should invest in stocks in the financial, materials, or energy sectors during inflationary periods.
However, while these sectors have historically performed well during times of inflation, both the energy and materials sectors experienced significant declines in 2011 and 2014, which were the previous two times that CPI was at or above the 3% threshold. Financials also saw a decline in 2011 but improved in 2014.
Given that the traditional sectors might not be the best investment during inflation, where should you look? The key is to identify companies that directly benefit from rising interest rates.
Keep an eye on Computershare and EML
One such company is Computershare Ltd, which holds around $25 billion in cash on behalf of clients. This means that every 1% increase in the interest rate translates to an additional $250 million in earnings for Computershare.
Historically, each time the RBA has begun to raise rates, as it did in 2009, CPU's share price found a long-term low and then rose strongly. With the potential for rates to increase, CPU is a company worth serious consideration to combat inflation.
Another company to consider is EML Payments Ltd. EML holds $2 billion in customer funds, so every 1% rise in interest rates generates an additional $20 million in earnings.
Like CPU, EML's share price has increased with interest rate changes. For example, EML’s share price reached its all-time low just before interest rates started to rise in 2009, with the stock soaring over 33,000% to its all-time high in 2021. Since peaking, the share price has fallen by over 90%, coinciding with a period of falling interest rates.
However, the share price has been rising again since October 2022, which is intriguing because the RBA started raising rates in June 2022 after years of consistent rate cuts. So, if the RBA continues to raise rates, EML could present a rare opportunity to pick up a stock with huge upside potential at its current price level.
Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au