A period of stagflation could pose a serious threat to investors if the current labour shortages, supply chain disruptions and high inflation figures persist, according to Stuart Clark, manager of the Quilter Investors Creation portfolios.
Stagflation occurs when inflation runs high while economic growth slows and unemployment rises.
This is a dangerous scenario for investors as it results in decreased spending power for consumers.
“With higher inflation occurring at the same time, it adds additional pressure to an economy,” Clark added.
Yet the manager thinks investors are underplaying this threat. Although he accepted high inflation will be transitory, he expected it to settle higher than pre-coronavirus levels and above what central banks are targeting.
“Inflation is currently the main risk investors are trying to navigate and how its direction will ultimately force the hands of the Federal Reserve and Bank of England,” he said.
“Some in the industry seem to believe that inflation will just simply return to where it used to be or around the Fed’s long-term average.
“However, supply-chain issues are not resolving themselves, and indeed seem to be deteriorating with the current spread of the delta variant, and trade is a long way from being considered ‘normal’ once more.”
As a result, Clark said keeping a close eye on how inflation progresses could offer clues as to the future direction of markets.
“Any signs of the recovery petering out and economic growth slowing, causing a bout of stagflation, could end up having severe consequences and spook markets into a fresh bout of volatility,” he added.
Inflation in the UK as measured by the consumer prices index jumped from 2% to 3.2% in August. Meanwhile, global growth expectations have fallen drastically, according to the latest Bank of America Global Fund Manager Survey.
Expectations of economic growth are now at a net 27% of respondents, which is the lowest level since April 2020 and down from a 91% peak in March 2021.
If inflation is not transitory, and it continues to rise at the same time as economic growth slows, stagflation could come back to haunt investors.
Performance of UK Consumer Price Index over 18 months
.png)
Source: FE Analytics
Although it can be difficult to find assets that will perform well during a period of stagflation, Clark highlighted three ways investors can beat it. The first way, he said, is to simply ride it out or keep some cash to buy the dips.
“The best strategy to beat stagflation is time in the market,” he argued. “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.
“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.”
For more active investors who are seeking opportunities today, Clark said there are two specific assets that can help portfolios in an inflationary world.
“Natural resources are one area, and in particular commodities that could benefit from the essential focus on lowering greenhouse gases globally,” he explained.
“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.”
Metals such as silver, copper and cobalt have become crucial to the global economy, and investors in the companies that mine these commodities stand to benefit from the trend of decarbonisation.
The second area Clark highlighted was semiconductors, one area where there have been major stresses in supply chains. Over the past 18 months, semiconductor companies have surged in value.
Performance of MSCI ACWI Semiconductors & Semiconductor Equipment index over 2yrs
.png)
Source: FE Analytics
Clark said that producers of semi-conductors should be “big winners” of the global chip shortage, which has plagued car manufacturers and technology firms.
“Semi-conductors are becoming increasingly important to the global economy as electric vehicles are pushed as the future and technology continues to be an everyday part of life,” he explained.
“These businesses have strong pipelines of business and should have significant pricing advantages as demand will remain elevated for some time.
“Funds with exposure to this area should serve investors well over the long term and outrun this period of high inflation.”