The 1970s era of stagflation bears “eerily similar parallels” to the challenges currently being faced by investors, according to new analysis by T. Rowe Price.
Recent increases in fuel, electricity and commodity prices, coupled with elevated geopolitical tensions and an urgent need for energy security, are similar to the situation seen in the ’70s.
“At the same time, a tight labour market sparks worries of a wage-price spiral and broader fears of a hot and embedded inflation that will be difficult to cool,” said T. Rowe Price head of Australian equities and portfolio manager Randal Jenneke.
The firm has predicted that rising costs will likely persist moving forward and will contribute to higher headline inflation throughout the remainder of 2022.
“We have gone from a prolonged period of globalisation and cheap inputs to relatively scarce and expensive ones. As such, input price gains far outstrip those of outputs,” said Mr Jenneke.
“In turn, we will likely see investor focus shift more from top line revenue growth to margin sustainability and their volatility. We have already seen the valuation gap between high margin and high growth narrow.”
Companies that are able to better manage these challenges, the firm suggested, are likely to have strong pricing power.
“To pass on costs effectively to buyers requires a good industry structure, differentiated products and defensive volumes,” Mr Jenneke noted.
Despite the similarities with the ’70s, the firm predicted that the risk of stagflation occurring again was only between 15 and 20 per cent and added that central bankers would likely do whatever possible to avoid repeating history.
Additionally, Mr Jenneke pointed out that there were a number of key differences between the previous period of stagflation and today, including the strength of consumer and corporate balance sheets and the energy crisis being much more acute in Europe than anywhere else.
“Overall, a repeat of the ’70s stagflation era is not our base case, however the parallels continue to grow,” he said.
“With them, we believe pricing power will help distinguish the truly defensive names, just as we can now distinguish some questionable and almost forgotten hair styles of the period.”
