How to invest in the event of stagflation in 2022? A rare situation over the past 60 years, the recent and rapid rise in inflation coupled with weak growth could push the economy into a phase of stagflation. This very exceptional situation has occurred only three times since 1960: in 1973/1975, in 1979/1981, and less markedly in 2008/2009.
This article explains the mechanisms of stagflation and its economic and stock market consequences. We will then look at the historical graphic study of the different phases of stagflation before looking at the investments to be favored in a period of stagflation.
What Is Stagflation?
The Economy: The Mechanisms of Stagflation
The mechanism of stagflation can be understood as stagnation in the evolution of consumer prices halfway between inflation (an increase in prices) and deflation (a decrease in prices). The word "stagflation" is a "false friend" because it does not indicate a situation of price stagnation. Here is the definition of the term stagflation:“Stagflation is the condition of an economy that simultaneously suffers from little or no economic growth and high inflation (i.e., rapid price growth). This situation is often accompanied by a high unemployment rate, thus contradicting the conclusions of Keynesianism and its Kaldor magic square ” (source: Wikipedia).
Often induced by an energy price shock in the same way as inflation, stagflation situations combine a factor of weak growth, or even economic recession, with a phase of rapid inflation. This situation, if it is prolonged, is bad for the economy in general, especially if wages do not follow.
Indeed, the general rise in prices is curbing consumption and encouraging household savings. A “dangerous” cocktail for growth already sluggish in the stagflation phase. The European Central Bank has accelerated the rise in key interest rates to counter recent inflation on our continent.
Stock Market: Consequences Of Stagflation
On the stock market, the return of inflation combined with the rise in interest rates has revealed a new context for more than 10 years: the notable resilience of the value segment in the face of the sharp decline in the growth segment, as evidenced by the MSCI Value and MSCI Growth indicators since the beginning of the year.
Charts of MSCI Value and Growth indicators since 2010
(Base 100)
Source: Msci.com
Over the last 10 years, we notice a clear advantage of the Growth segment (orange curve), until the end of 2021. The gap widens from 2018 to reach +342% in favor of the growth segment at the end of 2021, while the value segment (green curve) recorded only +147% over the same period.
Charts of MSCI Value and Growth indicators since 2021
(Base 100)
Source: Msci.com
When we observe the situation since January 2021, we note a catch-up in the value segment (green curve) between March 2021 and September 2021. Then, from the beginning of this year, we find a moderate decline in the value segment (-8.1%) in the face of a more marked fall (-25.8%) for the growth segment (orange curve). This situation has therefore been unprecedented for at least 10 years.
Stagflation: A Comparison of 2022 With 1973 And 2008.
Chart of growth rate and inflation since 1958 in France
Source: Tradingview
It is quite simple to identify the phases of stagflation in graphic reading. It is enough to identify the marked phases of divergence between the curve of inflation (orange) and that of growth (blue).
There have been 3 phases of stagflation over the past 60 years:
September 73 to September 75: very marked;
December 79 to March 81: fairly marked;
December 2007 to June 2008: rather moderate.COVID-19
The downward peak followed by the upward peak of the growth curve between December 2019 and June 2021 corresponds to the period of recession linked to COVID-19, followed by a strong recovery. We can also note an increase in inflation since the end of 2020.
In graphical reading, we are not yet in a situation of stagflation, but the trend of the curves seems to be heading in that direction.
In addition, the OECD recently revised France's growth down for 2022 to 2.4%. At the same time, inflation is accelerating further, with an expectation of 5.4% in June, according to INSEE.
Ray Dalio: How To Invest In The Coming STAGFLATION
What Sectors Should Be Favored In The Stock Market During A Period Of Stagflation?
Energy
Often a precursor to inflation, the rise in energy prices is seen upstream. These times of high oil and gas prices represent excellent times for companies in the energy sector thanks to their “billions” of profits. It should still be borne in mind that energy prices are very cyclical (the price of Brent was still at $25 at the start of March 2020 and is currently trading at $110).Basic Products And Services
Sectors related to agri-food industries, utilities, and mass distribution of basic products are good "anti-stagflation" candidates for a simple reason: populations still need to stock up on food, water, hygiene, electricity, and waste management regardless of economic conditions. However, higher-end foods, drinks, and cosmetics may see their momentum slow in the face of inflation.
The Pharmaceutical Sector
Since drug needs are inherent to health, pharmaceutical groups keep their demand levels constant over time. Nevertheless, investors wishing to defend against stagflation will avoid the biopharmaceutical segment mainly focused on R&D (Research & Development).
What Are Anti-Stagflation Investments?
Real Estate
Real estate can act as an anti-stagflation investment. On the one hand, the real estate assets are tangible, and on the other hand, the rents collected are generally indexed to inflation. It may be wise to focus on residential real estate with SRI standards and the themes of healthcare and logistics real estate.
Raw Materials
Give priority to raw materials essential to the economy, which retain their value in use or which are the basis for the manufacture of goods such as wheat, soybeans (oil in particular), or nickel (batteries of electric vehicles in particular). The offering of financial products such as trackers ( ETPs and ETFs), which have grown significantly in recent years, allows individual investors to easily position themselves on a commodity or a basket of commodities.
Private Equity
Another investment that can be considered for people who are less risk-averse is private equity and risk mutual investment funds (FCPR), which allow you to invest in the capital of unlisted companies. The theme of infrastructure funds that are available to individual investors via FCPRs can be an investment to consider with a long-term investment horizon.
Disclosure:
All of our information is, by nature, generic. They do not take into account your personal situation and do not in any way constitute personalized recommendations with a view to carrying out transactions and cannot be assimilated to a financial investment advice service, nor to any incentive to buy or sell instruments.
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