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24 March 2022

Asset Allocation: From reflation to stagflation?

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What a difference a month makes. In early-February, global investors were still fixated on how rising bond yields in a reflationary environment could derail risk assets. Then came the Ukraine-Russia crisis and the subsequent surge in energy prices soon pivoted the market narrative from “reflation” to “stagflation”. The current situation has triggered comparisons with the stagflation periods seen in the 1970s and early 1980s. But we believe that conditions prevalent today are different.

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What does this mean for your portfolio?

While consumption may take a hit if energy/food prices stay elevated for prolonged periods, the latter is however not our base case assumption. Longer-term, we believe the shortfall in oil from Russia will be partly offset by higher supply from US shale producers and OPEC, including potentially Iran. The rise in energy prices should also not translate to a sharp rise in bond yields because of Fed pragmatism and structural factors.

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