Stagflation Part 2

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How worried should one be if stagflation has already occurred? While prices will undoubtedly remain higher for a longer period of time, economists expect the consumer-price index to fall to around 4% by the end of the year as inflation-adjusted GDP falls from 5.7 percent in 2021 to around 4%. Slowing GDP and rising prices are not a recipe for stagflation. When you have the most economically harmful characteristics of high pricing and slow development, you should be concerned. When a company’s profitability is jeopardised, things get dicey. Firms respond by laying off workers, resulting in the type of severe unemployment that defined the 1970s.

A positive note 

Given the growing uncertainty about the outcomes of inflation, recession, and stagflation, investors should stick with quality, solid cash flows, and “profit achievability” that isn’t fully priced. Financials, materials, energy, consumer services, and healthcare have potential, while domestic small-caps and developing markets may benefit from longer-term value support. 

The chances are that the Ukrainian crisis will end relatively soon, implying that inflation will slow from current levels in the coming months. Peace would benefit Australian and European equities the most, and a better bet in such a situation would be to buy developing markets except China. 

Equal-weighted exchange-traded funds, which provide small-cap cyclical exposure, are another option for investors. In contrast, market-cap-weighted ETFs are dominated by companies such as Amazon.com.

Experts agree that commodities are the best bet for full-fledged stagflation. Boockvar of Bleakley Capital prioritises metals as miners, oil companies, and fertiliser producers. Then there’s cash, which, according to Boockvar, is likely the safest place to be during the current stagflationary period.

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