A global economic environment dominated by stagflation has become Antipodes ‘base case’ as global markets deal with a second supply side shock that the firms says will take a number of years to work through.
Portfolio manager, Sunny Bangia, said the firm had identified the risk of stagflation some time ago but the Ukraine crisis had amplified the risks around economic activity and inflation.
“So stagflation is definitely looking to be our base case,” Bangia said.
“Economic growth had begun to slow towards the end of last year as we passed the peak of COVID stimulus-led growth, meanwhile we had supply chain constraints, tight labour markets and tight housing supply.
“Even though supply chains were looking to ease this year, we’ve just been hit by another crisis with Ukraine, and the longer the war continues the greater the risk to economic activity globally. This further adds inflationary pressures into the system through soft and hard commodities.”
He said inflationary pressures were largely caused by global restrictions on Russian oil and gas as well as reductions in agriculture exports from the region with Russia and Ukraine producing around a third of the world’s wheat, a fifth of the world’s corn and about 15% of the world’s vegetable oil.
“And just to put a bit more pressure in the pressure cooker we’ve got Russia and Belarus controlling about 40% of the global potash market which is a key ingredient for farming, so no surprise we saw food prices rise by 13% in March and they are up over 35% year on year.
“Whether inflation will bite into discretionary consumption of goods and services is now the big question because low-income households are sensitive to rising rents, energy and food prices.”
Bangia said that in response to stagflation, Antipodes had reduced the overall cyclicality tilt in its portfolios and business resilience should be top of mind for all global equities investors.
“Stagflation is a challenging environment for equities broadly but we think a pragmatic approach to value investing can provide protection against stagflation and this means focussing on resilient market leaders that can take profitable market share against this backdrop of higher for longer inflation.”
