How to invest around stagflation

War in Europe feeds inflation and threatens to slow economic growth. Investors must review their portfolios now, writes Lauren Almeida

The Russian invasion of Ukraine has sparked fears of a return of “stagflation” across Europe, which could force investors to confront some of the toughest market conditions since the 1970s.

The war has caused rises in energy, fuel and food prices across the continent, adding pressure to already rampant inflation. A further squeeze on disposable incomes could hurt economic growth, which has not fully recovered from the pandemic.

Market pundits have drawn parallels with stagflation – a portmanteau of economic stagnation and inflation – in the 1970s, when embargoes prompted by the Yom Kippur War led to an oil crisis that sent the price of crude up by more than 300pc and stalled global growth.

This year, Western embargoes on Russian oil have helped to pushed its price to a 14-year high of $139 a barrel. Meanwhile, the world’s main stock markets have tumbled as investors have fled risky assets. The FTSE 100, which tracks London’s largest companies, has fallen by as much as 4pc since the invasion. The Stoxx Europe 600, the continent’s benchmark index, has been as much as 5pc lower.

Hamish Baillie, who co-manages the Ruffer Investment Company, warned that savers were facing an increasingly difficult market in which to preserve, let alone grow, their money, just as inflation eroded the value of their cash.

“This was not what we were expect

‘Diageo and Procter & Gamble look expensive. This means market falls could hit them hard’

ing at the beginning of the year. We thought there would be strong growth as pandemic rules were lifted. But war in Ukraine has increased the recession risk and inflation has become more sticky,” he said. “We need a new map to navigate this environment. Investors must reimagine where to find protection and look for assets that are not strongly correlated with the rest of the stock market.”

Michel Perera of Canaccord Genuity, a wealth manager, said “real assets” in infrastructure and property could help create meaningful diversification in investors’ portfolios as traditional stocks slumped.

“Commercial property funds have held up well despite the volatility,” he said, pointing to the L&G Global Real Estate Dividend index fund, which has gained 14pc in the past three years. He also highlighted the L&G Global Infrastructure Index fund and the actively managed Lazard Global Listed Infrastructure Equity fund for their allocation of money to defensive utilities and telecommunications firms.

Mr Baillie added that inflation assets such as index-linked bonds and gold were compelling options in periods of stagflation. Gold, which has surged by about 10pc since the start of the year to $ 2,000 an ounce, is traditionally viewed as a safe haven during market volatility. Mr Perera highlighted the Ninety One Global Gold fund, which invests in gold miners and has returned 77pc in the past three years.

With regard to stocks, Mr Baillie said he preferred low-valued, defensive companies in sectors such as healthcare and telecommunications. He highlighted the telecoms giants BT and Vodafone. “They are businesses with lots of pricing power and are still cheap despite robust demand,” he said.

However, he warned against some blue- chip companies that were often regarded as defensive but traded at high valuations. “Some investors enjoy a false comfort by investing in consumer giants such as Procter & Gamble and Diageo,” he said. “Their valuations look very expensive compared with historic standards, which means market falls could hit them hard.”

Dan Boardman-Weston of BRI Wealth Management said investors should consider firms with direct exposure to the oil and gas industry. “We like Shell and BP, whose share prices have risen by 4pc and 17pc respectively since the start of the year,” he said.

He also highlighted real estate investment trusts that offered savers inflation-protected income. He tipped LXi Reit, which has made gains of 26pc in the past three years and trades at a 2pc discount to the value of its assets. “It is a commercial property trust and

Testing times Taxi drivers brought central London traffic to a standstill in 1972 in protest about the cost of fuel. Fears are growing that, on current forecasts, the UK could be heading back to those tough days of 50 years ago