He does not believe that inflation will rise to the levels seen in the 1970s, but argues it will be much higher than has been the case for the past decade, and with very little growth.
Paul O’Connor, head of multi-asset at Janus Henderson, says: “The economy and the market in the second quarter of this year have certainly had the whiff of stagflation about them. Central banks are becoming less comfortable with the inflation we have. The price pressures in the economy are most acute on the supply side, which is not a good mix. “
Page says he is less concerned about the impact of the supply shock from the pandemic over the long-term, but says the UK economy has also had a supply shock from Brexit.
He says this has caused labour shortages in the UK, which will prove inflationary, and a restraint on economic growth “in the short to medium term.”
Page says that while there are some global supply side inflation issues, “the reason why the discussion of a 1970s scenario is happening right now is because, in the UK, there is a longer-term risk that Brexit will cause the short-term pandemic issues to endure for longer.
O’Connor says: “Brexit certainly makes the UK different right now. But I also think the danger is that consumers get worried about rising infection rates and become more cautious, which would reduce demand, but the supply issues could remain.”
However, he believes central banks will be able to manage inflation.
Paul Jackson, global head of asset allocation research at Invesco, says labour shortages would likely lead to wage inflation, and while this is perceived as being a positive for growth, it is likely not a positive for most asset classes.
He says in addition to labour shortages as a result of Brexit, additional paperwork and tariffs are impacting the cost of doing business for many firms, and all of this creates supply-side inflation.
How to invest in stagflation
Very few assets will perform well if stagflation takes hold in the UK, according to Jackson.
He says investors would probably find that borrowing costs rise, which impacts those firms that need to borrow regularly. In such a climate he believes the shares of the biggest technology companies would perform well as those businesses tend not to need lots of cash to operate.
Lagarias says in such a climate, “it would be much more important to be a stock picker than to be a passive investor, because the divergence in performance of different assets will be large.”
Bond perspective
Market participants have traditionally viewed the bond market as a guide to the economic outlook over the medium team.
