Resources to act as hedge in rising inflation world
Resources still have a “bright future” despite a slowdown in China and could provide a hedge against inflation in an inflationary world.
Speaking on a webinar, Shane Oliver, chief economist at AMP Capital, said: “Resources still have a bright future, yes there’s going to be volatility, things get out of hand sometimes and energy prices went through the roof but that’s come back a bit now.
“If we’re moving to a cleaner world, there’s going to be huge demand for metals like copper and aluminium, just look at the copper used in electric vehicles versus traditional ones, and Australia should benefit from that immensely.
“Commodities tend to do reasonably well in an inflationary world and provide a hedge against inflation.”
However, this boost for those metals involved in electric vehicles would be offset by lower demand for coal mining which was seeing competition from renewable energies.
“The resources sector will continue to do well but you have to allow for the fact that coal will suffer long-term losses as demand for it goes down and that will have an impact,” Oliver said.
“The adjustment there could be quite painful for those who are involved in the coal industry but that’s something we have to face as a nation because the cost of sustainables is coming down once you combine wind, solar, batteries.”
Inflation was a particular concern going into 2022, but Diana Mousina, senior economist, said it would be unlikely that Australia would face the same rising inflation as had been witnessed in the US.
“It’s just a bit of a frenzy going on, thinking that what happened in the US will be replicated in Australia but our latest inflation numbers weren’t anything to be concerned about. It is just getting to the bottom end of the RBA target so the inflation pressures here are not the same as in the US,” she said.
“If you are exposed to the share market, that will give you enough return to offset inflationary pressures.”
Oliver concluded, even if interest rates and inflation did begin to rise, it would be unlikely to cause a market crash.
“A crash is always a possibility, there is a risk that once we move from a low rate environment to a high rate environment, it could threaten markets,” he said.
“If the rise in interest rates is well telegraphed and spread out over time then it’s unlikely to cause a crash. You could still easily get a downturn of 10% to 15%, especially in a congressional election year, but it would be a correction in a rising trend.”
AUTHOR
Laura Dew
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