Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 472

How to position your portfolio for stagflation

It’s hard enough to protect wealth in the current environment, let alone grow the value of investments. The prospect of stagflation is the latest black cloud on the horizon. Stagflation is broadly defined as a period of high and rising inflation, slow economic growth and relatively high unemployment. Whether Australia is susceptible remains to be seen, and even if there’s no need to panic, fears are on the rise.

The origins of stagflation

The term stagflation is often attributed to Iain Macleod, who was Britain’s shadow Chancellor in 1965 when he declared:

"We now have the worst of both worlds – not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of 'stagflation' situation."

According to economic theory of the day, inflation and unemployment were inversely related. Rising prices were seen as a sign of an expanding economy which, in turn, drove employment up. It formed the basis of misguided policy which is largely blamed for the rise of UK stagflation. But it was the oil crisis of 1973 that triggered the problem in other parts of the Western world.

Arab members of the Organization of the Petroleum Exporting Countries (OPEC) proclaimed an embargo on nations that supported Israel during the Yom Kippur War. The supply side shock caused ‘gas’ prices in the US to take off. The stock market crashed, and the country fell into a deep recession. Unemployment climbed globally and in Australia annual inflation topped 15% by the middle of the decade.

Similarities to current shocks

Some commentators have been quick to see alarming parallels with the situation today.

As the world began reopening after the pandemic, the global economy was hit by a number of shockwaves. Pent up demand and supply chain issues caused price rises for goods including essentials like groceries and petrol.

The war in Eastern Europe has exacerbated these inflationary pressures. Prices for commodities that Russia and Ukraine supply, including energy, wheat, fertilizers, and some metals, have moved sharply higher.

In Australia, the cost of energy faces a number of additional challenges. The onset of winter, falling coal output, reduced coal-fired power generation, the transition to renewables are all playing into the current crisis.

As in other developed economies, the Reserve Bank of Australia is attempting to dampen demand and contain rising inflation with higher interest rates - heaping pressure on consumers and mortgage owners. We’re seeing financial market instability around the world and with the loss of confidence in global growth, increasing worries about recession.

Diversification to weather tougher times

In this scenario, it’s a good idea for investors to make sure their portfolios are positioned and diversified to weather higher inflation and lower GDP growth.

Every investor needs to assess their own situation, risk tolerance and investment priorities, but historically we’ve seen moves into defensive equities, also known as noncyclical stocks, because they are less correlated with the business cycle.

These include well established blue-chips that have stable operations, strong cash flow, and pay dividends which can cushion the stock’s price during a market decline.

On the alternative side of their allocation, investors have also added tangible assets such as gold. The precious metal has a proven 50-plus year track record and has shown historically to perform well in most inflationary environments.

The breakeven inflation rate in the table represents a measure of expected inflation derived from 10-year Treasury Constant Maturity Securities. The chart highlights gold price in USD, as well as the gap between annual CPI and 10-year breakeven inflation rate.

According to Schroders Strategist Sean Markowicz, CFA, gold is the top performer during periods of stagflation. He said:

"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."

[* nominal interest rate minus rate of inflation]

The chart below illustrates the average annual returns (both real and nominal) for Australian stocks, bonds and gold during years when real interest rates were below 2%

While employment in Australia remains strong, GDP slowed in the March quarter. Unfortunately, it’s clear that inflation is not the temporary phenomenon predicted six months ago. With promises of more rate rises from the Reserve Bank until demand softens, some see the trigger for stagflation.

In such a scenario it will pay investors to be prepared.

 

Sawan Tanna is the Treasurer of The Perth Mint, a sponsor of Firstlinks. The information in this article is general information only and should not be taken as constituting professional advice from The Perth Mint. You should consider seeking independent financial advice to check how the information in this article relates to your unique circumstances.

For more articles and papers from The Perth Mint, click here.

 


 

Leave a Comment:

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.