Investors are shifting their focus on portfolio balance in the wake of an unprecedented ‘perfect storm’ of economic shocks, according to Invesco.
According to the investment management firm, the shift is towards allocations to cash, gold and bonds for safety following a raft of crises including a major European conflict, a pandemic, a global trade war, Brexit and major financial crises in the US and the Eurozone.
These factors have led to competing dynamics of high inflation and low interest rates, and supply shocks, wars and revolutions in commodity producers have caused “stagflation”, the investment management firm said.
The entire global economy, markets and peacetime international system are under assault, it said.
Invesco’s most recent analysis showed the threat of global stagflation, with double-digit inflation slowing growth and the risk of rising unemployment in many world markets.
“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,” Invesco said in its report.
For investors, this scenario comes amid already high inflation, ultra-low interest rates and richly valued bonds and equities in core markets, the report continued.
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.”
“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,” he added.
“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.”
(Reporting by Imogen Lillywhite; editing by Seban Scaria)