The wealth and investment management house crunches the data to work out the kind of assets that offer most protection if "stagflation" comes back like a bad dream from the 1970s.
The ugly word “stagflation” – mixing stagnation and inflation – is like a bad dream returning as economists and investors fret that rising prices pressures will overlap flagging growth. And, if this scenario plays out, they also want to know what it will mean for asset allocation?
Strategists at Schroders, the UK-listed firm, think that if stagflation becomes reality it should be good news for gold and other “defensive assets.”
Gold has often performed well in stagflation environments. For example, Schroders crunched data and found that the top performers during periods of stagflation have been gold (+22.1 per cent), commodities (+15.0 per cent) and real estate investment trusts (REITs) (+6.5 per cent). Equities, however, have tended to struggle (-1.5 per cent).
“This makes sense. Gold is often seen as a safe-haven asset and so tends to appreciate in times of economic uncertainty. Real interest rates also tend to decline in periods of stagflation as inflation expectations rise and growth expectations fall. Lower real rates reduce the opportunity cost of owning a zero-yielding asset such as gold, thereby boosting its appeal to investors,” Sean Markowicz, CFA, strategist, research and analytics, says in a recent note.
His comments come as wealth management houses set out forecasts for 2022 and guides on asset allocation. Developed countries’ equities rose robustly in 2021, although Asian equities and those in emerging markets have lagged. Citigroup has predicted continued equity gains next year, albeit modest. The first half of 2021 saw a strong rebound in economic growth alongside rising inflation, but it appears that growth momentum is slowing. Fiscal and monetary boosters are fading – governments’ budgets are already stretched and it is worth remembering that in much of the developed world, central bank interest rates have been very low, or even negative. Inflation is elevated as a result of supply-chain snags and surging energy costs. (It is also possible that large central bank money printing may have added to inflation.)
The Schroders note came out a day before UK official data showed consumer price inflation rose 5.1 per cent in November. In the US, producer price data rose 9.6 per cent in that month from a year ago.
“Taken together, concerns are brewing that a stagflationary environment – one of low growth but high inflation – may be unfolding,” Markowicz said.
Gold’s safe-haven status is a value, while commodities (raw materials and energy, etc) are a source of input costs for companies as well as a key component of inflation indices. So, they will typically perform well when inflation rises too (often because they are the cause of the rise in inflation), he said. He said REITs offer a partial inflation hedge via the pass-through of price increases in rental contracts and property prices.
Analysis of US Treasuries shows that they offer uncertain benefits. “In theory, they should benefit from falling real rates, driven by declining growth. However, rising inflation eats into their income, putting upward pressure on yields and downward pressure on prices,” he said.