Stagflation poses a threat to investors as the economic recovery continues, warns Quilter Investors.
According to Stuart Clark, portfolio manager at Quilter Investors, inflation is likely to settle at a higher rate than recent history, potentially above target, and will ultimately “force the hands” of central banks.
Clark says: “Inflation is currently the main risk investors are trying to navigate. The expectation is that inflation is transitory and this does seem to be the case. However, 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.
“How inflation progresses, in line with economic growth, is what the central banks will be watching closely and it is understandable that investors will want to do the same thing. 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.”
Clark believes the best strategy to beat stagflation is investing for the long-term, riding out volatility and reducing risk.
For those looking at opportunities now, Clark says assets such as natural resources, in particular commodities, can help in an inflationary environment while allowing investors to take advantage of long-term secular trends.
Clark explains: “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.
“Metals such as silver, copper and cobalt are becoming increasingly crucial to the global economy. For those more environmentally and socially concerned, there are also more and more businesses and fund managers focused on how these metals are mined and take these risks very seriously.”
Clark says investors may also benefit from looking at areas which are enduring supply chain issues, specifically producers of semi-conductors, amid the global chip shortage that has impacted car manufacturers and technology firms.
He adds: “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. 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.”
[Main image: artur-tumasjan-unsplash]
