The probability we assigned to a stagflation scenario has increased significantly in recent months. Such a market condition would curb growth and consumer spending, add pressure on corporate profitability, compress market multiples, challenge weaker business models, and put central banks in a difficult position with a hawkish bias. Stagflation thus represents a headwind to long duration assets with scope for commodity, financials, and alternative assets to benefit.
From a multi-asset investment point of view, some repositioning of portfolio to protect against or even benefit from a stagflation scenario is justified. Since the start of the year, we increased our exposure to US financials that will benefit from rising rates, and commodities-sensitive assets such as gold, energy, and industrial metals that shielded portfolio from rising geopolitical tension and demand-supply imbalance.
Higher inflation is also likely to see a supply side response with larger investment in infrastructure and focus on sustainable energy. For example, we find PPP and renewable infrastructure assets appealing as the underlying revenue tends to be inflation-linked while the demand is less directly sensitive to the economic environment. We have also invested in logistics real estate assets, which not only shields us from rising inflation, but also benefits from long-term thematic trend of ecommerce growth. These types of assets have generally outperformed the broad market in 2022.