(Times Now News) - New Delhi: Sean Darby, Global Equity Strategist at Jefferies said that the Russian invasion of Ukraine has pushed the odds of a stagflation scenario for most equity markets into H2'22 and the bond markets appear to agree with the yield curves flattening while breakeven inflation expectations remain elevated.
He noted that there are more than a few similarities between the 1970s and the 2020s. The early 1970s saw a wave of commodity inflation that contributed to a wage spiral as consumer incomes were threatened. The decision by OPEC in 1973 to restrict oil supply produced an ‘oil shock’ that overwhelmed the global economy and policymakers.
It was only when Fed Chairman Paul Volcker increased interest rates from 1979 to 1983 that the stagflation period ended. By coincidence, the post-pandemic recovery delivered one of the strongest nominal GDP booms since the 1950s but the mining, energy semiconductor, shipping sectors, etc. were ill-prepared for the scale of demand.
Sean Darby in the same report added that the Ukraine invasion has produced dual-energy and food shock that has caused markets to re-consider another leg to the supply-side shock that is exacerbating transportation bottlenecks. He also noted that the Russian invasion of Ukraine has led to fears that a prolonged war will mean some of the disinflation benefits such as low military spending to GDP, offshoring, and free trade agreements will be unwound.
Sean Darby, Global Equity Strategist said that unfortunately, the group of asset classes that can deliver the best returns is quite small which is led inevitably by inflation protection bonds, gold, and precious metals. Equities can produce modest nominal returns but there will be a wide dispersion and commodities inevitably come out well. Sean Darby said comparing 2020s vs 1970s has some caveats which are:
1) Portfolio diversification through international equities and government bonds was unheard of during the 1960s to 1980s.
2 ) Technology sector has become a dominant force in producing disinflation through innovation and now represents a large weighting in indices.
3) Inherent monopolization of an industry can be both a curse and a cure. If governments impose price caps or price controls, the monopoly can find itself with inferior returns.
