Shares that should do well as inflation takes off

There have been warnings of UK inflation heading to 5%. When the source of that warning is the Bank of England’s chief economist I think it’s worth taking note of.

Yet for long-term investors, there’s likely not too much to worry about, and the recovery in the FTSE 100 recently shows others presumably agree. I think these two shares should do well long term and through any inflationary period. 

A potential winner from inflation

One of the most likely beneficiaries of any interest rate rise to combat inflation would be banks. I’ve previously owned Lloyds Banking Group (LSE: LLOY) shares and I like the bank. The share price has done well so far this year as part of the recovery from the pandemic, but also I suspect because of expectations that interest rates may rise. Yet I don’t think it’s necessarily too late to invest because Lloyds shares are still well down on pre-pandemic levels.

The UK bank could potentially see an increase in bad loans if insolvencies pick up and household finances come under pressure from inflation and rising energy costs. Lloyds is very reliant on the UK economy. It doesn’t have the diversification of income of a bank like Barclays which also does investment banking. Therefore, if the UK economy falters, Lloyds shares could well struggle. 

However, the dividend potential is attractive. My colleague Rupert recently explained how Lloyds could soon be paying a dividend yield of 8.2% on the current share price. 

A growing dividend, a share price still below pre-pandemic levels, investor preference for value shares at the moment, and an improving financial performance all combine to tempt me to buy Lloyds shares.

A faltering share

While Lloyds is arguably a value share enjoying a share price recovery, the same cannot be said for beleaguered ASOS (LSE: ASC). The ASOS share price is down about 40% over the past 12 months. Much of this seems to be investors’ expectations being too high rather than anything being fundamentally wrong with the business. It’s still, in my opinion, a high growth share.

A new management team coming in could be seen as either a risk or an opportunity. Time will tell. The new team could reenergise the business. Or they could come in and reveal a whole list of issues left behind by the outgoing management, assuming there are any. It’s not unheard of for new management teams to do this, as it lowers expectations.

Besides new management potentially ‘kitchen sinking’ with bad news, I think the biggest risk is that continued poor investor sentiment towards fast fashion brands, partly the result of environmental concerns, sees the ASOS share price fall further.

The reason why I think ASOS could be a good share to own in an inflationary environment is that it should have pricing power. Fast fashion should remain popular with millennials, and I think ASOS will be able to pass on costs to customers while keeping a lid on cost increases.

Longer term, I think the company will be a winner. With the valuation low compared to historical standards, the shares are starting to look attractive to me.

Andy Ross owns no share mentioned. The Motley Fool UK has recommended ASOS and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.