Further to last week’s column on the arrival of inflation, I’ll cover what to do about managing your money and how to help it grow despite a potential downturn. Economists disagree on whether stagflation will continue to eat into the economy. They do, however, agree that no-one really knows what to do about stagflation.
It’s a pretty ugly scenario – no growth, or even a retraction, coupled with inflation. Jackpot.
Further pressures on this are the current conflicts, and those poking sticks where they shouldn’t be, might rue the impact on their economies.
Conflict between any countries is not good and when you are winding up countries you need for your economy, it can be painful. We are seeing the weaponisation of the US dollar which is being used in sanctions. As those sanctions are applied, the nations move away from the dollar which weakens it further. This drives up the cost of imports – more inflation with no growth – stagflation.
As the US ‘niggles’ at China, they slow production/manufacturing and are less likely to be supportive. In response, the west has to move their manufacturing elsewhere. It won’t be as competitive either by cost, or speed, as the infrastructure isn’t there. Meanwhile the ‘protectionists’ against foreign labour (immigrants) have reduced that labour supply and with an abundance of jobs, employees are demanding more income. That’s wage inflation and is the noose for any economy.
These are all stagflationary pressures, and, while interest rate increases are normally used, higher rates won’t solve any of the above. In fact, raising rates will impact growth further. As Christine Lagarde said: “Raising rates won’t bring down the price of energy.” As private and public debt levels are at record highs, raising rates could easily create a financial crash. Economists disagree on raising rates, but, in 2008 and 2011, the Bank of England allowed higher inflation to occur so as not to impact growth. It worked and inflation retreated.
Managing your money
One solution is of course to take away the dependency on oil and further regulate energy prices more closely. The move to greener energy will have served many consumers well and as more move toward it, demand will fall and drive prices lower.
As I said a few weeks back, however, the real impact is being walloped on the lower earning families with estimates they could lose as much as £1,300 per year, and the average family losing £900. Nine out of 10 adults state their cost of living had increased and have reduced their expenditure on non-essentials. This is the start of loss of further growth.
I reiterate my support of hitting the energy companies with a windfall tax and supporting the lower earning families by easing their energy bills. This would keep the economy flowing.
When we saw that inflation was starting to move north over a year ago, we mentioned how value stocks would be one of the better stabilisers or, hedge.
Growth stocks tend to be unprofitable and reflect future earnings while value stocks valuations are closer to current earnings and tend to be profitable.
UK equities still represent better value. For example, the UK market is trading at 10 times their 2023 forward earnings, while the US is trading at over 16 times. And so, UK value stocks do look a better bet if we are faced with stagflation. For example, defensive companies that offer services to us that we actually need, do well.
In a growth environment, we try to hold as little inventory as possible as it’s dead capital on the shelf. But those holding large inventories where there are clear supply shortages can demand higher prices, as others are folding through shortages.
It is no surprise that the biggest value stock outperformances were in the 40s, 70s and 2000s which also happen to be the big inflationary periods.
Schroders assessed the returns from 11 global economic sectors during stagflationary environments versus the MSCI world index as a comparison. It showed that utilities outperformed the most (16 per cent), consumer staples 14.2 per cent, followed by real estate, energy and healthcare at 11.8 per cent, 8.4 per cent and 6.7 per cent. Gold and commodities are the two other obvious choices with the latter carrying significant volatility.
Do not assume your pensions are being actively managed to rebalance assets as above so speak to an independent financial adviser who will be happy to guide you to the most appropriate funds.
If you found Managing your money to outsmart stagflation interesting, you’ll find more UK financial commentary from Peter on our Finance channel.Tags: MSCI world index, Peter McGahan, stagflation Last modified: June 8, 2022