Real assets with pricing power provide inflation-protected opportunities

Oksana Patron

29 April 2022

The recent shift among investors’ thinking about inflation and an expected acceleration of the inflation growth has seen Martin Currie Australia to reduce its exposure to “less-inflation protected CBD-based office assets”, Mirvac and Dexus but increased exposure to Charter Hall Social Infrastructure and toll road companies.

Aston Reid, portfolio manager of the Martin Currie Real Income Fund, said that although he believed that real assets provided a compelling inflation-protected investment opportunities and meaningful income upside potential, he stressed that many real asset companies also emphasised the growing impact of inflation across their supply chains and labour forces.

Therefore, it was equally important for those companies to have inflation protection mechanisms in place.

“We have been focused on owning real assets with inflation protection mechanisms and strong pricing power that should exhibit meaningful cashflow growth as inflation rises,” Reid said.

“A company with strong pricing power will be able to pass costs through to consumers, allowing them to control their margins. What investors must determine is to what extent consumer demand will be affected by companies passing on costs in an inflationary environment.”

According to him, shopping centres, toll roads and regulated utilities could benefit from inflation pass-through mechanisms as many of them had rents, tolls or changes linked to the Consumer Price Index (CPI) or rents closely correlated to tenants’ sales which would translate in higher cashflows as prices were rising and boosted revenues.

Reid quoted Transurban as an example of a road toll road operator which had tolling mechanisms linked to Australian and US CPI.

“Our view is that Transurban’s higher toll prices remain affordable in the context of inflation-driven price increases,” he said.

Similarly, real estate segments, such as retail, were also well-positioned to offer ‘solid inflation protection’. This included regional and super-regional shopping centre operators such as Scentre Group, which was also one of the Fund’s larger holdings.

On the other side of spectrum were CBD-based office, Mirvac Group and Dexus Group.

“One of the key portfolio positioning decisions we have made is to reduce our exposure to less-inflation protected CBD-based office assets, in favour of everyday needs assets,” Reid stressed.

“We reduced our exposure to stocks such as Mirvac Group and Dexus Group and increased our exposure to Charter Hall Social Infrastructure and toll road company Atlas Arteria.”