Where to Invest During Stagflation as Economic Concerns Mount

Mohit Oberoi, CFA - Author
By

Jun. 28 2022, Published 10:01 a.m. ET

Stagflation concerns have been rising in the U.S. Mohamed El-Erian, an economist and the president of Queens' College at Cambridge University, thinks that the U.S. economy is already in stagflation. What is stagflation and where can you invest during stagflation?

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Stagflation is termed an "economist’s nightmare." During stagflation, while inflation is high, the GDP growth stalls and unemployment rises. Policymakers are left between a rock and a hard place as the medicine for one ailment ends up amplifying the other. For example, while rate hikes can help lower inflation, they also have a negative impact on economic growth, which leads to more job losses.

The U.S. economy witnessed stagflation in the 1970s.

The U.S. economy witnessed stagflation in the 1970s. Just like in 2022, rising crude oil prices were a major concern in the 1970s. The oil shock of 2022 is being caused by Russia’s invasion of Ukraine and the resultant Western sanctions.

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El-Erian isn't alone in predicting stagflation, and several economists see the U.S. economy headed for stagflation. Barring the employment situation, which still looks strong despite job losses in various sectors of the economy, the U.S. economy is showing signs of stagflation.

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Where can people invest during stagflation?

Just like policymakers face tricky choices during stagflation, investors face the dilemma of where to invest in stagflation. However, there are some areas where one can invest during stagflation.

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Value stocks are good to buy during stagflation.

During stagflation, value stocks and companies with low valuations can outperform on a relative basis. Also, companies that have pricing power and can pass on the higher input cost prices to buyers despite a sagging economy are good bets.

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In 2021, Goldman Sachs identified Proctor & Gamble, Nike, Oracle, and PPG Industries as among the large-cap companies with pricing power. Similarly, value stocks, which anyways trade at tepid valuations, don’t have room to fall much in stagflation.

Pharma companies like Abbott Labs and Pfizer can be good bets in stagflation. Spending on non-discretionary healthcare usually isn't impacted much, whether we are in a recession or stagflation.

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Look out for safe dividend stocks during stagflation.

Dividend stocks and companies with high free cash flow yields can also be good investments during stagflation. It would be prudent to look out for safe dividend stocks as companies can either suspend or lower their dividends during periods of economic turmoil.

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Energy stocks can be a good investment.

Energy stocks can be a good investment during stagflation. The sector is anyways outperforming in 2022 and has seen buying interest from legendary fund managers like Warren Buffett and Stanley Druckenmiller. Gold stocks can do well in stagflation.

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Invest in real assets during stagflation.

During stagflation, investing in real assets like agricultural commodities, housing, and energy can also be a good idea. Since prices of commodities generally rise during stagflation, investors can get pure-play exposure by investing directly in commodities. There are several ways to invest directly in commodities, including buying bars of silver and gold.

Avoid these investments during stagflation.

Risk-averse investors can avoid growth stocks with elevated valuation multiples during stagflation. Also, me-too companies with little to no pricing power can best be avoided. Since the central banks have to raise rates during stagflation, investors can also steer clear of long-term bonds.

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