Average annual percentage dynamics of various asset classes (in blue – nominal, in blue – real) during the stagflation of the 1970s (from left to right): Brent oil, silver, gold, WTI oil, wheat, nickel, aluminumhousing, copper10-year US government bonds, S&P 500 (total return, i.e. including reinvestment). Source: Deutsche Bank
While economists are debating whether the US economy is headed for stagflation or just recession, Deutsche Bank is bracing for the worst. Late last week, bank strategists Jim Reid and Henry Allen published a report titled “Investing in a Stagflationary World: What Happened in the 1970s” in which they shared their thoughts and made some predictions.
In particular, the paper pays special attention to the question of what to expect from various asset classes if inflation stays with us for a few more years. And the answer is that traditional financial assets, such as stocks and bonds, will destroy the real capital of investors, while in the previous forty years they quickly created this real capital.
Commodity assets look much more promising, which, however, have already risen in price significantly in recent years, Deutsche Bank strategists note. Nevertheless, their share in investor portfolios, according to the bank, is currently only 5%, which is very small. Therefore, the prospects for an increase in the weight of these assets in portfolios create prerequisites for further growth in the commodity market.
But gold and silver in the last two years have shown noticeably weaker dynamics than commodities in general. Therefore, if the period ahead of us will be similar to the 1970s, then today precious metals look very cheap relative to possible prospects.
“History never repeats itself, but it does serve as a guideline for how to think in the next few years if inflation remains high even after a recession provoked by the Fed,” Deutsche Bank strategists conclude.
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