Three ASX inflation-benefitting stocks to watch in October 2022

From February 2020 to February 2022, the Reserve Bank of Australia (RBA) expanded the money supply by an unprecedented 375%. Of the $549.5 billion in currency and call accounts, over $400 billion didn’t exist three years ago.

Increases in the money supply of this magnitude tend to create inflation, and we’re seeing some right now.

In June 2022, the Consumer Price Index (CPI) hit a 30-year high of 6.1%. The last time CPI exceeded this level was December 1990, after Saddam Hussain invaded Kuwait.

The RBA forecast back in May that the CPI would remain above 4% at least until the end of 2023.

Some components of inflation are rising even faster:

• Weekly rents in Sydney rose by 23.7% in September 2022 compared to a year ago, according to SQM Research
• Weekly rents nationally rose by 14.8% over the same period
• The average spot price of electricity (excluding WA and NT) for August 2022 increased by 221% compared to August 2021

So, who will benefit from increased inflation over the next 12-24 months?

Here are the three stocks to watch:

1. Origin Energy – energy production
2. Commonwealth Bank – banking
3. Insurance Australia – floating rate note

Origin Energy Limited

Origin Energy Ltd is involved in the exploration and production of natural gas in Australia, electricity generation, wholesale and retail sale of natural gas and electricity, and the sale of liquefied natural gas in Australia and for export.

Origin’s share price suffered during the pandemic, as did its bottom line. The company recorded impairment losses in 2020-22 totalling $4.9 billion and net losses of over $2.3 billion and $1.4 billion in 2021 and 2022, respectively. Of the $2.6 billion in impairment losses in 2022, $2.2 billion were hedging losses due to higher electricity and natural gas prices.

In 2020 and 2022, Origin also recorded operating losses of $0.2 billion and $0.7 billion, respectively.

However, things are looking up for Origin.

Wholesale electricity prices have risen significantly over the past year. For the 2022 financial year ending in June, Origin made a $713 million profit despite hedging losses, compared to a $348 million loss in the prior year.

Origin made a $92 million profit in its oil and gas division due to rising gas prices for the 2022 financial year ending in June, compared to a $231 million loss the previous year.

As long as inflation continues to affect natural gas and electricity prices, Origin appears to be well positioned to benefit.

Commonwealth Bank Limited

In terms of banks benefiting from inflation, there isn’t a lot to differentiate between the big four banks: Commonwealth Bank of Australia, Westpac Banking Corp, Australia & New Zealand Banking Group Ltd, and National Australia Bank Ltd.

The reason for singling out Commonwealth Bank is its portfolio weighting towards mortgages – it has the highest exposure.

Mortgages as a percent of total exposure at default:

Source: Fitch Ratings