Chronic 1970s inflation looms, shrinking economy, markets rattled

The painful combination of chronic 1970s-style inflation and a shrinking economy means that you might need to rebalance your investments, warns the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.

The warning from deVere Group’s Nigel Green comes as global stock markets are tanking as investors fret that central banks will be forced into aggressive monetary policy tightening to combat surging consumer prices.

He says: “Stock markets around the world are rattled as the average global inflation rate reaches a red-hot 7.4%. 

“In the U.S., UK and Germany, inflation has risen to the highest rate for 40 years. Consumer price growth has even begun surging across Asia, a region that until recently had largely been able to avoid the broad-based global trend.

“Inflation in Latin America’s largest economies is the highest it’s been in 15 years; the overall rate in Sub-Saharan Africa is expected to grow to 12.2% this year; the Netherlands this year nearly tripled to 9.2%; and Australia’s has doubled to 5.3%.”

The reasons for the painful inflation we’re experiencing have been well-documented. 

“Supply chain disruptions from the pandemic; lockdowns in China – sometimes dubbed ‘the world’s factory’, Russia’s war in Ukraine, and governments pumping unprecedented levels of aid directly to households and businesses, have all played their part,” says the deVere CEO.

“What remains unknown is how long this difficult period of high inflation will go on for and what will be its lasting ‘legacy’.

“There are legitimate fears that we could return to chronic 1970s-style inflation, the negative impact of which is being exacerbated by a shrinking economy.”

Ahead of what is going to be a huge week for central banks whose remit is to control inflation, over the weekend, Nigel Green said: “Raising interest rates is a blunt weapon in this fight.  

“Hiking borrowing costs can only do so much to address the triggers of inflation on the supply side of economies.”

He added that raising interest rates to fight inflation is also a “dangerous weapon” too.

“Inflation is hitting lower and middle-income families up to a third harder than the richest ones, according to research, because they need to spend a higher proportion of their income on essentials such as food and energy.

“Clearly, something needs to be done to shield the poorest families from the worst effects of rising prices.

“However, hiking interest rates may not be the solution. Why? Because lower-income households are the ones most likely to have credit – and higher interest rates mean higher borrowing costs.

“In addition, it intentionally slows the economy which might then trigger a recession and stunt companies’ efforts to invest and create jobs which, again, would have a greater negative financial impact on poorer families.”

In order to both safeguard and grow your wealth during this ongoing bout of inflation and with the possibility of a recession “looking a lot more real,” the deVere CEO says investors should revise their portfolios to ensure they are best-positioned.

“For example, exposure to sectors including energy, commodities, pharma and consumer staples with strong branding ability seems sensible in this environment.

“As ever, you should remain invested in the market and ensure that your portfolio is diversified. Diversification is key and plays an essential role in managing volatility.”

Nigel Green concludes: “The Great Inflation of the 1970s is looking increasingly likely to make a comeback, causing market jitters as investors get nervous about central banks’ response.

“Now is the time to consider rebalancing portfolios.”

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