Equity Strategy: Into The Headwinds

Feature Stories | Nov 04 2021

As central banks begin to tighten policy amidst a slowdown in the global economic recovery, it will not be such smooth sailing for equities in 2022.

-Inflation high as economies slow
-Supply shortages set to linger
-Central banks begin to tighten policy
-Chinese policies driving structural slowdown
-Where to invest?

By Greg Peel

If there is one word generating fear among financial market investors right now it is “inflation”. Given inflation is remaining stubbornly high on a global basis when delta has brought about a slowing the pace of economic growth out of last year’s turmoil, market commentators are even using the word “stagflation”.

This expression was coined in the 1970s as a mix of economic “stagnation” and high inflation. Investors have every reason to fear stagflation – from January 1966 to May 1982 the Dow Jones Industrial Average fell -73%.

But what the world is experiencing right now, can it honestly be called stagflation?

Living in The Seventies

I got my driver’s licence in 1979 in my HSC year. I abruptly found myself stuck in a queue for petrol. At that time I could only buy petrol on even-numbered days as my number plate ended in an even number.

Making the situation more frustrating was the fact that Sydney train drivers were almost constantly on strike. When there were no trains I had to drive to school, if I could buy some petrol. It wasn’t just train drivers. Airport workers, post office workers, brewery workers… it was a long list…were also frequently on strike.

Australia had enjoyed a post war boom, not just in babies but in the economy, as households bought their first car, fridge, washing machine, television and all else to go in their first house in the suburbs. The economy was also “riding on the sheep’s back”, until the mineral boom took over.

Back then, central banks had no mandate to control inflation. Inflation had already begun to rise on the back of the economic boom but when the first Arab oil shock hit in 1973, after Nixon scrapped the US dollar’s peg to gold, and another in 1979, due to the Iranian Revolution, OPEC embargoes sent the price of the most important economic input soaring and inflation ran into the double-digits.

The seventies saw a deep global recession. Unemployment levels also rose into double-digits. Angry unions demanded pay rises and brought the economy to its knees. An upward wage-price spiral ensued. The Australian dollar was pegged to the US dollar. There were no listed banks, insurers, telcos, supermarkets – if not privately owned, they were owned by the government.

Let’s just say life, and financial markets, in the decade that fashion forgot were very different to what they are today.

Which is why economists are scoffing at the notion of 2021 “stagflation”.


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