The current state of high inflation and crashing markets indicates stagflation. A period when the inflation rate spikes while the economy slows down to an almost standstill - stagnation.
Stagflation is reflected in individuals’ diminishing buying power and rising borrowing costs, resulting in sluggish growth and an increase in unemployment. In these times, wages are unable to keep up with inflation, and a volatile economy forces companies to lay off employees.
Reasons for stagflation:
Our present condition is a consequence of myriad factors that intertwine to create a cascading effect. From the global supply shock created by the Ukraine-Russia war to rapid market rebalancing and correction post-pandemic.
Consumer Price Index (US) - 12-month percentage change
The federal banks’ attempt to tame inflation by raising interest rates has only aggravated the financial balance. High commodity and oil prices with slashed incomes could be leading us fast into the stagflation phase.
How to navigate forward and position our portfolios
Although the global equity market is falling, on the whole, some sectors are relatively insulated from the crash. These industries are under lesser stress and better poised to capitalize on the high inflation.
Our stagflation strategy should invest in these industries and diversify portfolios to the sectors essential for human sustenance. This will ensure that our losses are minimized, and our investment footholds are positioned best for stagflation.
Ways to invest in stagflation.
There are primarily two ways to invest in stagflation. First, invest in companies that minimize gross losses. And second, invest for gains in companies that could outperform and rise to the top at the end of stagflation.
1. Defensive and Commodity stocks
Defensive stocks make a great hedge against stagflation as they are essential for day-to-day existence. People may move towards brands with cheaper or affordable products, but they will not stop buying the essential items - gas, toothpaste, etc.
Sectors like healthcare, telecom, and energy fall under the roof of defensive stocks. The returns for these investments would be low but steady, exactly what is required in slow economic growth.
2. Value Stocks
Value stocks trade at lower prices than their worth according to market indices like P/E value, Sharpe ratio, etc. Since these are undervalued prices, they make excellent investments when your buying power is handicapped.
High inflation periods herald an economic rebalancing where old companies are dissolved and new companies rise to become the market leaders. It is essential to identify these companies early and invest so that when the market turns, we can be on the brighter side of it.
3. Real Estate
Stocks of real estate businesses, real estate debt funds/ REIT’s and physical property can keep up with inflation and yield competitive returns in bullish markets. While in stagflation these can become banks that curb your wealth erosion due to higher prices.
4. Gold, Silver, and Essential Metals
Gold and essential metals have been the traditional hedge against inflation for the longest time. The value of precious elements depreciates slowly, making them ideal instruments to offset the equity risk and hold off abrasion from inflation. You could invest in stocks of precious element mining businesses, their ETF or physical bars/ coins.
5. Necessary technology
High-growth tech stocks or equity will bear the brunt of stagnation, leading to sudden growth cap and dip in revenue. But tech that is essential to society will keep generating returns, just like any commodity. Cloud, blockchain, social media, and IoTs are ideal examples of necessary technology.
It is undebatable that any kind of safety during this downtrend is relative, where recession is almost inevitable. It's a matter of which sectors are more buoyant and resilient in the long term.
Long-term investments will be crucial for recovery and recuperating losses, once the stagflation ends. Big time scales will help build the runway for the next instance of the upward market cycle.