Source: Bloomberg, Unigestion, as of 30.09.2021.
Stagflation is the opposite of the macroeconomic environment we have had for most of the last decade: decent growth and muted inflation pressures. Thus, investors have moved into positions that benefited the most over the last decade: nominal bonds (where yields continued to grind lower and have offered diversification) and equities (especially those with long-term growth prospects that have benefited from falling discount rates). However, the reversal of the macro environment to a period of stagflation is likely to lead to a significant reversal in these markets.
Our chart shows the average monthly performance of growth (credit spreads and equities), defensive (government bonds), and real assets (inflation breakeven and commodities) since 1999 and compares that to their performance in “Goldilocks” and “Stagflation” months. As the chart demonstrates, the dispersion between these two regimes is significant, making the transition from a Goldilocks scenario (as arguably we had at the beginning of this year) to an inflation shock with depressed growth a challenging one for investors.
Note: “Goldilocks” months are defined as those where our Global Growth and Inflation Nowcasters signalled low to very low risk of recession or an inflation shock. “Stagflation” months are defined as those where our Inflation Nowcaster signalled high to very high risk of an inflation shock but our Growth Nowcaster signalled the economy was not in a strong expansion (low to very high recession risk).
The information and data presented in this page may discuss general market activity or industry trends but is not intended to be relied upon as a forecast, research or investment advice. It is not a financial promotion and represents no offer, solicitation or recommendation of any kind, to invest in the strategies or in the investment vehicles it refers to. Some of the investment strategies described or alluded to herein may be construed as high risk and not readily realisable investments, which may experience substantial and sudden losses including total loss of investment.
The investment views, economic and market opinions or analysis expressed in this page present Unigestion’s judgement as at the date of publication without regard to the date on which you may access the information. There is no guarantee that these views and opinions expressed will be correct nor do they purport to be a complete description of the securities, markets and developments referred to in it. All information provided here is subject to change without notice. To the extent that this page contains statements about the future, such statements are forward-looking and subject to a number of risks and uncertainties, including, but not limited to, the impact of competitive products, market acceptance risks and other risks.
Data and graphical information herein are for information only and may have been derived from third party sources. Although we believe that the information obtained from public and third party sources to be reliable, we have not independently verified it and we therefore cannot guarantee its accuracy or completeness. As a result, no representation or warranty, expressed or implied, is or will be made by Unigestion in this respect and no responsibility or liability is or will be accepted. Unless otherwise stated, source is Unigestion.
Past performance is not a guide to future performance. All investments contain risks, including total loss for the investor.