Asset allocation: preparing for stagflation

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Inflation

Russian President Vladimir Putin's intervention to ease gas prices went some way to calm investor fears last week, writes Philippa Aylmer.

But with rising prices and the world economy constrained by shortages of labour and components, the threat of stagflation is becoming a major theme amongst investment managers. 

In terms of asset allocation, Schroders remains optimistic on the global growth outlook believing that activity should continue to pick up with the re-opening of the world economy. They are still positive on equities and commodities but underweight on government and corporate bonds. We expect equities to be supported by robust earnings growth which will more than offset the impact of higher bond yields states the latest Schroders Global Market Perspective. 

Meanwhile Althea Spinozzi, senior fixed income strategist at Saxo Bank Group has suggested that 
inflation-linked bonds could be helpful as they pay the inflation rate while higher-yielding nominal bonds will provide a buffer against rising inflation and interest rates. Consumer staple stocks will be a good bet too because they are necessary to live despite high inflation she states. “There will always be a need for commodities, while in the short-term inflation and commodity prices are correlated, in the long run, higher prices will depress economic activity, pushing commodity prices back down.” 

Stuart Clark, portfolio manager at Quilter Investors believes there are two specific ways for investors to navigate this environment. “Finding assets that will perform well during a period of stagflation can be difficult, but the best strategy to beat stagflation is time in the market. These periods are not permanent fixtures, so investing for the long-term is the best way to ride out the volatility and reduce risk in trying to predict the end of stagflation. Indeed, even holding some firepower back in the shape of cash will allow you to take advantage of any volatility and purchase assets at a lower price than they are now.”

Clark suggests that for those looking for opportunities right now, commodities that have the potential to benefit from lowering greenhouse gases globally. “Developed economies and global companies are in a race to become net-zero when it comes to carbon emissions and as such commodities that help achieve this stand to benefit. Not only that but they also give investors access to a degree of inflation protection and benefit from fiscal spending on large infrastructure projects as this has been identified as a way to power the recovery.

Whatever happens, retail investors should not play with market timing, states Alberto Matellán, chief economist at MAPFRE, a Madrid-based multinational insurance company. “In other words, they shouldn't enter the market now because they think companies have fallen a lot. “It’s tempting, but it’s not the right strategy.” 

Matellán also believes that the current inflationary period is down to mainly political issues and that there is every indication that a solution will be sought. "Inflation caused by raw materials is always temporary, they usually contribute between two and three tenths to the year-on-year CPI in Europe, and there is no reason to think this won't be a temporary phenomenon," he says. 
 

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