This could be slowflation, not stagflation – and it’s better for stock markets

  • Stagflation concerns troubled stock markets this year, and interest rate hikes have threatened to push some of them into bearish territory.
  • Analysts are now predicting that we could see slow-down for the next 12 to 36 months.
  • With stock markets expected to perform better now, here’s how analysts suggest you allocate your funds.

With the pandemic and the Russian-Ukrainian war, global economies have been affected by too many factors that have caused central banks and governments to change course too often. The result is confusion about where the economy will go and what shape the recovery will take, if there ever is one.

For weeks, experts around the world have been concerned recession and stagflation – a combination of slow growth, inflation and unemployment.

But now analysts at UBS suggest things are looking up, saying the global economy may be looking towards “slowflation” instead of stagflation.

“Inflation slowdown” refers to a scenario in which growth and inflation co-exist, but growth remains at the lower end while inflation is in the medium to high range.

“Over the next 12 to 36 months, we believe we are likely to enter a period of decelerating inflation, which we have defined as a period of ‘medium to low’ growth coupled with ‘medium to high’ inflation. “, said a report from UBS. .

Analysts say stagflation is a rare event, which, combined with market data, makes them more likely to “slowflate”.

Slowflation won’t be as bad as stagflation

Stagflation has also stoked bear market concerns, but the report says things will ease going forward. While the S&P 500 has already entered bearish territory and stayed there for some time, analysts expect markets to rebound soon.

“Equities unsurprisingly generated better returns during slowflation than during periods of stagflation,” the report adds, comparing returns between 2000-2011 and periods of stagflation.

Unlike stagflation, the equity allocation for a slowing inflation scenario will be different, with some sectors expected to grow or rebound faster than others.

Energy, Materials, Utilities and Financials hold the highest positions in the equity allocation, accounting for nearly two-thirds of the total allocation when it comes to Asian equity markets.

This could be slowflation, not stagflation - and it's better for stock markets
Equity allocation in a slowflation scenarioUBS / Business Insider India / Thrive

UBS’s research runs counter to comments from economists like Mohamed El-Erian, who said “stagflation is inevitable.” The HUL chief’s warnings also seem ominous, regardless of how stock markets perform.

It remains to be seen how economies around the world react to interest rate hikes, but growth could also be higher than expected – as many sectors eye a rebound from the pandemic.

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