How inflation can be an investor's friend

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Interest rates are rising, and inflation is sitting at 5.1% - the highest it's been for many years.

It's a cue for investors to change tack. But that doesn't mean bailing out of equities. Even high inflation can present opportunities.

Here are three key issues investors need to be aware of.

sponsored inflation opportunity for investors

1. Not all inflation is created equal

The first aspect to understand about inflation, is that it is felt differently across various industries.

It is often the ability to pass on rising input costs that determines how well an industry will fare in an inflationary world.

This makes it important for investors to look for sectors and companies that can adjust their pricing ahead of inflation, or which are price resilient.

As a guide, the materials and energy sectors both sell products such as oil, that sit at the start of the input chain. So they are well-placed to pass on costs.

Technology-based stocks also tend to have a high degree of resilience to rising prices. This is because they tend to have the benefit of tremendous scale. So higher input prices may only have a limited impact on their cost base.

Industrial stocks can also be resistant to inflation owing to their ability to price goods in a way that reflects supply and demand dynamics.

It's been interesting to see Jaaims already moving into these sectors.  This highlights the algorithm's ability to capture real-time changes in company data, such as price/earnings (PE) ratios, and adjust stock holdings accordingly.

2. Rising inflation is global

Australia is not the only nation to experience a rapid rise in inflation.

The US has seen the cost of living jump 8.5% over the last year. The UK has just recorded 6.2% inflation. In the Euro area, annual inflation is expected to be 7.5%.

The surge in inflation isn't restricted to wealthy economies. Emerging markets and developing nations have also been bit with a wave of rising prices.

The World Bank describes the scale of the issue saying, "78 out of 109 emerging markets and developing countries are confronting annual inflation rates above 5%".

This global trend to rising prices is the result of a complex variety of factors. Among them are high levels of government support to help economies through the COVID-19 pandemic, supply chain woes - again caused by the pandemic, and surging commodity prices, which have been exacerbated by the conflict in Ukraine.

The upshot is that no matter whether you invest in Australian stocks or global equities, the same issues apply around selecting shares that can weather high inflation.

3. A passive approach may deliver lacklustre returns

Given the factors driving cost of living prices, there is plenty of scope for inflation to push higher. And it won't be a quick fix for central banks.

In this environment, the passive investment approach of index-based exchange traded funds (ETFs) is likely to deliver lacklustre results.

As I've noted, some sectors and companies will handle inflation well. Others will be negatively impacted. The trick for investors is to sort between the two.

Fortunately, the Jaaims algorithm is doing exactly that.

Moreover, our newly launched AI Active Global Long Portfolio, driven by Jaaims' technology, is investing in those sectors likely to thrive in today's high inflation world.

It's taking the guesswork out of investing for Australians who need to make their money work harder at a time when rising prices are putting the squeeze on household budgets.

Any advice provided is general in nature and does not take into account the viewer's specific needs and circumstances. You should consider your own financial position, objectives and requirements to determine the type of advice and products to best suit your needs. Jaaims Australia is an Authorised Representative of Jaaims Technologies, AFSL 519985.

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Tui Eruera is the founder of Jaaims, an automated trading platform that uses artificial intelligence (AI) to derive stock recommendations. He founded Jaaims in 2018. He holds an MBA from Deakin University.