Stagflation: A cause for concern?

When we look back a decade from now, we’ll think of how the recent years have been a rollercoaster for investors. We started the year 2025 with high hopes about the “tech rally” that carried investors through 2024, and were immediately punished with the largest one-day wipeout in US stock market history, a whopping US$600 billion drop from Nvidia’s market value on 27 Jan 2025.

Investors pushed on, however, only for President Trump and the US administration to announce globally-imposed tariffs on imports into the US, changing the free-trade market entirely and pushing the world towards a potential trade war. 

Since then, things have changed considerably, but the uncertainty felt by investors in the first half of the year is unlikely to fade anytime soon, with one word being thrown around more often than others, “stagflation”. 

A phenomenon that gained prominence in the 1970s, stagflation represents an economic anomaly. In the 70s, it was caused by a combination of high budget deficits, cuts in oil production and lowered interest rates. Could we see the same thing happen again in 2026?

What is stagflation?

Stagflation is an economic phenomenon characterised by high inflation, stagnating economic growth, and elevated unemployment rates all occurring at the same time. This rare combination poses significant challenges for policymakers and investors alike.

Key characteristics of stagflation include:

• Persistently high inflation rates
• Stagnant or declining economic output (as measured by GDP)
• Rising unemployment levels
• Reduced consumer spending and business investment

While true stagflation remains uncommon, concerns about its potential resurgence have always been around the corner. Factors such as supply chain disruptions, geopolitical tensions, and unprecedented monetary policies have contributed to inflationary pressures and economic uncertainty, raising fears of a stagflationary environment.

Read more: War, oil price, inflation and volatility

What causes stagflation?

Stagflation occurs when an economy experiences stagnant growth and high inflation simultaneously. Several factors can contribute to this challenging economic scenario:

Supply shocks

Supply shocks, such as sudden increases in oil prices or disruptions in global supply chains, can trigger stagflation. These events can lead to higher production costs, which companies may pass on to consumers, resulting in inflation. Simultaneously, these increased costs can reduce economic output and employment, causing stagnation.

Monetary policy missteps

Central bank actions can inadvertently contribute to stagflation. For instance, if monetary policy is too loose for an extended period, it may lead to excessive money supply growth. This can fuel inflation while potentially creating economic imbalances that hinder growth.

Other contributing factors

Additional elements that may cause stagflation can include:

• Structural changes in the economy, such as shifts in labour markets or industry regulations
• Declining productivity growth, which can limit economic expansion
• Persistent government budget deficits, potentially leading to currency devaluation and inflationary pressures

Global economic implications of stagflation

From a macro and global perspective, Stagflation cripples global competition. As costs rise, exports become too expensive for the world to buy. Meanwhile, the currency loses value as inflation eats its worth and slow growth drives away investors. While a weak currency can help exports, it often backfires by making imports more expensive, fueling even higher inflation at home.

Central banks also face a difficult dilemma, making monetary policy unpredictable and leading to increased currency volatility and a “flight to safety” towards strong currencies. 

The potential for economic contagion is a significant concern. As major economies struggle with stagflation, the ripple effects can spread to their trading partners and beyond. Some other repercussions include:

• Disrupted supply chains
• Reduced foreign direct investment
• Heightened global economic uncertainty

These factors can contribute to a slowdown in global economic growth, potentially leading to a prolonged period of economic stagnation across multiple regions.

Distinguishing Stagflation, Inflation, and Recession

While these terms all signal economic shifts, their impact on your wallet and portfolio varies greatly. Inflation often mirrors a booming economy where high demand drives prices up. In this climate, stocks and real estate usually thrive as companies pass on costs.

Recessions, by contrast, are driven by a collapse in demand. While growth and employment fall, prices often drop as well, making high-quality bonds and defensive equities a traditional refuge.

Stagflation is the “worst of both worlds”. It pairs the high prices of inflation with the job losses of a recession. This creates a “policy trap”: raising interest rates to fight inflation hurts growth further, while cutting rates to save jobs fuels higher prices. For investors, this makes commodities and real assets essential.

The 2026 reality: A "Dual Dilemma" in the fog of war

As of March 10, 2026, the global economy faces a classic stagflationary trap. The U.S.-Iran conflict has weaponised the Strait of Hormuz, stalling global supply chains through the closure of the Persian Gulf. This has driven crude oil to a peak of driving crude oil to a peak of $119 per barrel, creating a massive inflationary shock that acts as a “tax” on every link of production. As manufacturing and logistics costs soar, companies are implementing hiring freezes to protect margins.

Simultaneously, the February Nonfarm Payroll (NFP) report revealed a staggering contraction of 92,000 jobs, pushing the unemployment rate to 4.4%. The Fed is now paralysed: they cannot cut rates to support a weakening economy without risking an inflationary spiral, nor can they hike further without deepening the recession.

The volatility has already triggered a “flight to safety”, causing a brutal wipeout in speculative markets. The AI sector, once the primary driver of 2025’s growth, has seen a massive valuation correction as energy costs for data centres soar, while the cryptocurrency market has crashed amid a global liquidity squeeze. These collapses highlight the fragility of high-growth assets when faced with a structural supply-side crisis.

Effects of stagflation on your investments

For investors, traditional safe-haven assets like bonds may struggle as rising interest rates erode their value. Treasury bonds, while potentially benefiting from falling rates, are negatively impacted by rising inflation, which erodes income and puts pressure on yields. Historically, equities also struggled during stagflation, with returns often turning negative as companies face falling revenues and rising costs. 

The complex interplay of these factors makes asset allocation difficult, underscoring the need for careful planning and diversification in portfolios to mitigate the adverse effects of stagflation.

Which asset classes perform better during stagflation?

Some assets become more attractive during stagflation, including real assets, inflation-linked products, and stocks of companies with pricing power.

Real assets are often favored as they possess intrinsic value and can offer a hedge against inflation. This category includes gold and other precious metals, which have historically been seen as safe havens during times of economic uncertainty and high inflation, retaining their value when currencies may be depreciating. 

Commodities, such as crude oil, industrial metals, and agricultural products, also gain appeal. This is partly because supply-side shocks, which can contribute to stagflation, often directly cause an increase in commodity prices. Real estate, particularly where rents can be adjusted to reflect inflation, can offer a degree of inflation protection. However, a rising interest rate environment can exert downward pressure on property values.

Another key asset class designed to protect against inflation is inflation-linked bonds. In Hong Kong, iBonds are prime examples.

Within the equity market, stocks of companies with pricing power tend to outperform during stagflation. These are firms with strong brands, unique technologies, or essential services that allow them to effectively pass on their increased operating costs to consumers without significant loss of demand. Such companies are often found in defensive sectors like consumer staples, utilities, and healthcare, as well as some resilient technology sectors. 

High-dividend stocks from companies with stable cash flows and consistent dividend-paying capabilities, including utilities, consumer staples, or REITs, generally show resilience during economic downturns.

Investing in a single asset carries concentration risk, while frequently adjusting holdings can increase market timing risk. Endowus advocates for a disciplined, long-term strategy based on sound investment principles. In periods of stagflation, diversification becomes even more crucial. 

However, we should focus on the long-term instead of overreacting to immediate updates. President Trump’s "soon, very soon" rhetoric regarding the war’s end can cause violent market upswings. Selling into a panic often means missing the subsequent recovery, and we should not focus on timing the market. Even during challenging times, maintaining a globally diversified portfolio across various asset classes ensures investors benefit from the market’s long-term upward trend, which is an inherent reflection of global economic expansion.

Get in touch with our advisors on how to stagflation-proof your portfolio

Economic phenomena can pose significant challenges to traditional investment strategies. By recognising the signs of stagflation and adapting your approach accordingly, you can better position yourself to weather economic uncertainties.

It is essential to stay informed and seek expert financial advice to navigate these complex economic conditions. Our SFC-licensed advisors can guide you and your investments through potential economic uncertainties.

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