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The return of stagflation?

Aspect Capital shares its insights into the potential implications of a stagflationary environment on asset owners’ portfolios and the possible solutions that can be put in place to mitigate its effects.


The following paper was originally written in October 2019, in response to a client question about the possible impacts of a stagflationary environment on long-term asset owners’ portfolios. At the time, the risk of stagflation seemed a remote possibility. However, the unprecedented fiscal and monetary stimulus provided by central banks and governments in response to the Covid-19 pandemic has prompted a fascinating debate in economic circles, between those who see the sudden and widespread impact on consumption precipitated by the crisis as having a deflationary effect, and those who view inflation as the inevitable result of the unprecedented supply shock and injection of capital into developed economies. Regardless of which side of the inflation debate one takes, the post-pandemic state of the global economy merits consideration. In light of that, we are sharing our insights into the potential implications of a stagflationary environment on asset owners’ portfolios and the possible solutions that can be put in place to mitigate its effects. 



Some describe central banks as chaperones, whose job it is to take away the punchbowl just as the party gets going. In the clutches of the Covid-19 pandemic, however, the response has been to lace the punch with an unprecedented injection of liquidity and public debt. Consequently, it seems entirely possible that when we emerge from this extraordinary situation we will be confronted by, in Niall Ferguson’s words, ‘An almighty fiscal and monetary hangover ’, in the form of renewed inflationary pressures. At the same time, growth rates have stalled - obstructed initially by trade wars and unstable geopolitics, and more recently (and significantly) by the aggressive social measures taken to contain the pandemic. In light of this, it is not inconceivable that stagflation could make a late entrance and ruin the party for everyone.


We define stagflation in a way that is of most relevance to pension plans: the combination of sustained high inflation and prolonged stagnant economic growth, which leads to persistent erosion in the real value of asset owner portfolios.

We utilise data from deep history to understand the nature of stagflation occurrences and their potential impact on traditional portfolios. Furthermore, we study more recent data to make our analysis relevant to today’s world. We demonstrate that a commodity-heavy trend following system combined with multi-asset cross-sectional carry models as well as potential short-term alpha trading strategies can provide a well-rounded solution for traditional portfolios during stagflationary periods. Our solution also has positive expected returns during non-stagflationary periods. Given the low likelihood of stagflation occurring but its impact being profound, such a solution needs to produce useful returns during non-stagflationary periods, which is something that long allocations to commodity markets fail to achieve.

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