Stagflation Concerns Spur Focus on Commodities as a Safeguard

(Bloomberg) — Some Australian super-fund managers are concerned bonds and equities are vulnerable and instead are turning toward commodities to guard against the prospect of global stagflation.

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Inflation is proving resilient and there is a risk that it’ll remain high even as growth sags, Raphael Arndt, the chief executive of Australia’s sovereign wealth fund, said Thursday at the Australian Financial Review Alpha Live 2023 event.

“The big issue is stagflation, an inflationary world with low economic growth, and what can you do in that world,” said Arndt whose fund oversees A$250 billion ($165 billion). “Commodity exposure, gold and other inflation pass-through assets are quite attractive at the moment,” given concerns about equity valuations and also bond markets pricing in lower rates.

Managers of the world’s fourth-largest pool of retirement savings are assessing their strategies as global policy makers signal a determination to tame inflation at all costs. Investors are hedging for the possibility that the Federal Reserve may not pivot to an easing this year, as expected by markets.

“The Fed isn’t necessarily going to come to the rescue” with rate cuts the way that bond and stock markets are anticipating, said Katie Dean, head of fixed income from AustralianSuper Pty, the country’s biggest privately run pension manager with A$274 billion of assets. Dean agreed that commodities are attractive in a stagflationary environment while speaking at the same event.

Secular stagnation may have been broken by the events of recent years, said Gerard Minack, the founder of Minack Advisors and formerly a global strategist at Morgan Stanley.

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“The secular trend has shifted,” Minack said. “For four decades of secular stagnation, we saw every single cycle peak in the 10-year Treasury yield was lower than the prior peak, every trough was lower than the prior trough, until last year. Unless you were trading rates in the ‘70s, you’ve never seen what we saw last year.”

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