- Competing dynamics of high inflation and low-interest rates challenge conventional investment strategies
- Invesco analysis indicates that the entire global economy, markets, and peacetime international system are under assault
- Supply shocks, wars and revolutions in commodity producers have caused “stagflation”
Analysis from Invesco suggests that investors shift focus on portfolio balance to include allocations to cash, gold and bonds for safety in the wake of an unprecedented ‘perfect storm’ of major European conflict, a pandemic, global trade war, Brexit and major financial crises in the US and Eurozone.
The Invesco analysis – conducted by the firm’s global market strategists – highlights the threat of global stagflation with double-digit inflation, slowing growth and the risk of rising unemployment in many world markets. It suggests that as the Ukrainian invasion began, much of the world economy including the US, Eurozone, UK and many Emerging Markets were growing quickly. However, the analysis shows that inflation had already been hardwired into the post-pandemic global economy in 2021 and is now persistent, and increasingly broad-based across many countries and day-to-day items.
Historically, growth and inflation typically move in the same direction. However, the Russo-Ukrainian War and retaliatory sanctions are engulfing key supplies of energy, metals and minerals for much of EMEA and Asia, threatening to bring down growth but boost inflation. When wars have been concentrated in commodity-producing countries, like the Russia/Ukraine conflict, the resulting supply shock can cause “stagflation”, whereby there is high and rising inflation despite falling or negative growth. For investors, this scenario comes amid already high inflation, ultra-low interest rates and richly-valued bonds and equities in core markets.
Arnab Das, Global Market Strategist at Invesco said: “As citizens, savers and investors we face a mix of uncomfortable realities and uncertainties that make it hard to know how to think about the economy and markets. Looking through the long-term effects of pandemics and conflicts on inflation, growth and the behaviour of markets, portfolio balance is pivotal.”
The global system is also grappling with a widespread market sell-off, with very few asset classes avoiding the carnage. Invesco reports high yield bonds, investment-grade corporate bonds and sovereign debt experienced some losses in April. Energy and agriculture were some of the few areas that actually experienced gains for the month. However, with renewed and extensive COVID-19 lockdowns in major Chinese cities, the global recovery remains on shaky ground.
Das said: “Fixed income remains a crucial part of a portfolio during these periods of volatility. We see risk aversion and higher commodity prices ahead as well as potentially lower growth. If there is stagflation, some bonds would benefit from the slowdown while others would suffer from higher inflation. The impact on corporate debt, exports and currencies could vary from country to country. A diversified portfolio – including fixed-income – could help weather the uncertainty better than a heavy shift into cash or gold.”
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