WEBVTT

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You're listening to Strictly Business
Podcast with Lindsay Williams.

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With me is John Stockford, Head of
Multi-Asset Income at 91 in London.

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And the subject matter today is
stagflation.

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Now, John, I've been in the markets for
quite a long time in various forms, and

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stagflation seems to come up every couple
of years,

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but never materializes.

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This time, it might be different, because
apparently in a random survey, 70% of

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market participants

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I think there is a threat of stagflation.

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Are you one of those 70%?

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Well, yes, at the margin.

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I guess it depends what we're talking
about.

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So we are, particularly the US,

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we think some of the policies that have
been enacted are likely over the next 12

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months or so to

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depress growth and push inflation up a
bit.

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But to some extent, it's whether that
becomes more persistent, I think, that is

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a sort of more difficult question.

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Yes, I think that the tariff situation
only plays out maybe in three to six

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months'

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time as the prices filter through to the
inflation numbers.

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But what we are seeing is inflation not at
the CPI level, because that came in, I

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think, in the States at 2.7%,

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which was better than expected.

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But it's elsewhere.

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It's in the PMI services sector index.

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It's the prices paid in that area.

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It's also in PPI, the wholesale prices,
which went shooting up recently.

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So there is some inflation there and
there's a slowdown in the jobs market and

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GDP looks a bit vulnerable.

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So it's all got the sort of nascent
fundamentals for stagflation, I think.

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Yeah, I think that's right.

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We'd also chuck in what's going on with
immigration.

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So stopping people entering the country
and sending some people back is...

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hitting labour supply, which also hits
demand,

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but leaves the labour market a bit tighter
than it might otherwise be.

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So there's a whole number of things.

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And so we would expect growth to be
somewhat negatively impacted.

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And you're right, we're at levels on
labour market or jobs growth that are,

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if they continue to decelerate, I think
that would catch the attention of

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central bankers and markets to some
extent.

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I mean, we're close to what you might
describe as a trigger point for a much

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more negative picture.

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That's not really the focus, I think, of
the market.

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Ironically, you know, people have been
talking about stagflation,

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but it doesn't seem to bother the equity
market at all.

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And we can talk about that.

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And to some extent, actually, you could
argue that the bond market at least

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sort of short to medium dated bonds have
been behaving fairly, you know, in a

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fairly relaxed manner.

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So what people are saying and what they're
doing are perhaps a little bit different.

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It's very interesting you talk about the
markets and how they're behaving,

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because there was a lovely quote in the
Reuters article that piqued my interest in

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stagflation.

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And it says stagflation is in the mind of
the markets, but not in the price.

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At some stage, of course, it will manifest
itself in the price.

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Let's just have a fantasy.

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Our fantasy is that there is going to be
stagflation.

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So we have to work out what goes first,
what happens first.

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Is it the bond market that triggers some
kind of correction in markets?

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Well, I think there are a number of things
going on.

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So we think the market is very relaxed.

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If you look at, you know, people have
revised right down any risk of recession.

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People, I think, have taken comfort in the
limited past three we've seen.

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in CPI so far.

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But it just seems to me that's all a bit
premature.

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I mean, you're only now, I think,
beginning to know what tariff levels the

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US is going to apply.

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And it's going to take time for that to
fully manifest itself in growth, jobs and

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inflation data.

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You can see it's beginning to have an
impact.

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If you look at customs duties raised by
the US,

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they're picking up pretty quickly so
tariffs are happening.

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It's just I don't think we've seen them
really in the data so far.

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So if we do start to see more stagflation,
it may shake some of the complacency in

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markets.

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Markets obviously panicked in April
post-liberation day,

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and they've actually then reversed all of
that and more,

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and they're now clearly just focused on
things like AI again and so on.

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But it just feels as though

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Lots of different indicators suggest that
the equity market is pretty complacent.

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There are some people who've held back on
adding exposure, but generally lots of...

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indicators on valuation, on things like
volatility, on volumes, on breadth,

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concentration, all of those kind of things
suggest the market is pretty much priced

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for perfection.

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So if something comes along and jolts
that, you could see at some point a

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reappraisal.

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And so I think that is an increasing
vulnerability.

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I mean, you could have said it for a
while, but given how much or how quickly

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the market has reversed.

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I think we're sort of, it does look
vulnerable again.

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On the bond market side, I mean, it's
interesting because you can make the case

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that the Federal Reserve will worry

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more about any signs of a slowdown in jobs
than they will about a pickup in

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inflation, because to some extent,

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the pickup in inflation is a bit like a
VAT increase.

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It will probably mostly be one off.

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You'll see a rise in prices this year to
reflect higher tariffs and then the rate

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of change next year.

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that those numbers will drop out of
inflation.

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They're obviously concerned about
persistence, but if the job market is much

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weaker, they'll think, OK, well,

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we're unlikely to get persistent
inflation.

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And so you may end up, ironically,

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with a weaker stock market and actually
investors happy to own shorter dated bonds

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because, you know, the Federal Reserve are
switching to rate cutting mode again.

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And other central banks as well.

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I think it's less of an issue it does seem
to be

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obviously mostly focused on the US because
that's the country raising tariffs.

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There'll be a bit of a drag to growth,
maybe a mixed inflation probably.

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So, you know, their central banks can sort
of just respond more to domestic

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conditions, I think.

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And then you've got the whole question of
the longer end, which is really all about

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the amount of government borrowing that
governments plan

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to do over the next few years and how easy
that's going to be financed.

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So steeper yield curves and lower
equities, I think is a definite risk.

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if stagflation manifests it, and we think
it's too early to conclude that it won't.

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But what you're suggesting is if there is
stagflation, it's going to be a brief

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phenomenon, you know,

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as the tariff effect comes into effect,
then it'll be a once-off,

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and the markets next year, for example,
early next year, will start to go back to

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normal.

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So inflation will start to come down off a
higher base rather than the opposite,

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which is the case now.

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It's going up.

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or for low base?

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Yes and no.

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I mean, I think that's true.

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I mean, that's what I'm saying about
inflation.

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I'm saying that I think the thing that's
most significant will be what happens to

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the economy, I mean,

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to growth and particularly the jobs
market.

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So if that has weakened, if it weakens
much further,

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there is a risk that people will begin to
revise up again expectations actually that

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this isn't just

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stagflation, this is...

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recess, it's basically a more, it's a more
damaging,

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more negative backdrop for the global
economy.

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That is definitely, that's the thing that
people have decided isn't going to happen.

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So if you look at, you know, the Bank of
America fund manager survey, I think

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something like 4%

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or 5% of people expect a recession now.

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And that's down from, you know, high
teens, probably post.

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liberation day, maybe even higher than
that.

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So people have basically decided
everything's going to be fine.

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And that's why the equity market's doing
so well.

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That's where I think the biggest
vulnerability is.

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I mean, yes, people worry a bit about
inflation and typically higher inflation

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is not a good

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environment for either bonds or equities
and equities probably are worrying about

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it less.

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But yeah, I mean, I think the thing that's
going to scare the market most is if the

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US economy

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weakens substantially further rather than
you know,

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just muddling through this year and then
actually benefiting maybe from some of

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Trump's other policies into

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2026.

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Given what you've just said over the last
few minutes, it's actually quite scary.

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And it's scary because of the elevated
level of, for example, the United States

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stock markets,

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the S&P 500, etc.

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Because, as you say, they're priced to
perfection.

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And any little wobble, anything that is
not part of that perfection.

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can send things tumbling.

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I like the way you described the sell-off
as a reappraisal.

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But if we get a reappraisal like we did in
early April, and it's actually based on

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something more than just tariffs,

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then it could become something more
serious.

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And on that note, are you and your team
mindful of this and positioning yourself

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for such an

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eventuality?

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I mean, yes, to an extent.

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I would make two points.

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The first is, you know, I mean, the market
looks vulnerable.

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That doesn't mean it's going to sell off,
you know, as we know.

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these things can keep going longer than
you think makes sense.

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And there are also some areas where things
look less extreme.

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So sort of, you know, so-called real money
investors aren't as long as they were

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perhaps before, you know,

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coming into this year in terms of equity
positioning.

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But a lot of other things are sort of
flashing red.

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So there are a few things flashing amber,
I think.

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The other point I would make is that we've
actually lived through over the last

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decade or so

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an environment where even though the stock
market has gone up, every so often you've

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had some pretty significant setbacks.

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So, you know, 2015, 16, 2018, 2020, 2022,
this year, you know,

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April, and so on.

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So it wouldn't be particularly
extraordinary if it happened.

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The way that we're taking account of it is
we're struggling to some extent to find,

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you know,

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income generating equities that look
particularly attractively valued.

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There are some.

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We're finding more things that are
attractively valued out in the US within

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the sort of sovereign bond markets where
we think interest

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rates are sort of too pessimistically
priced in some cases.

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But the thing we can do is we can use
options to essentially keep a foothold in

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the equity

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market and benefit if the market continues
to go up,

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but close our positions without too much
of an impact if the market goes down.

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So the the nice thing about options
they're like insurance and at the moment

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because the

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market's complacent they're not charging
much for that insurance so

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you can buy upside participation but not
experience the downside or you can buy

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downside

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protection and continue to own the

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long side so either way round you've got a
skewed outcome and it's not costing very

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much to buy and the analogy I've

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used in the past is we're in a sort of
tinder dry grassland living in a thatched

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house.

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There are fires potentially could break
out.

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The weather's very hot.

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But actually, you can insure your house
very cheaply.

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Why wouldn't you?

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And that's where I think we are in the
equity market.

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John, the final point is that on the day
that we record this podcast,

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there's been two inflation readings
outside of the United States of America.

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The first is the UK, where you are, and
inflation going up to 3.8% year on year in

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July.

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up from 3.6% and Rachel Reeves and the
Bank of England must be looking at that

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with a little bit of concern.

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And also going to emerging markets, South
Africa's inflation has jumped from 3% to

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3.5%.

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So it's not just the US, it's also
elsewhere and not just developed world

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countries.

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Well, so I think you've got to look at the
trend.

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The trend in South Africa actually has
been much better than expected inflation.

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So if you asked people a year ago, where's
inflation going to be, they wouldn't have

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said three and a half.

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percent yeah um and yet so there are base
effects that moves up and down a bit but

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ultimately a lot of emerging markets

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actually have had a better inflation
experience than a lot of developed markets

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00:12:49.321 --> 00:12:51.321
and yet you can earn pretty high yields in
their

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bond markets even if you then hedge those
the

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00:12:52.946 --> 00:12:59.868
currency risk back to dollars or sterling
you can pick up a decent yield in a market

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00:12:59.868 --> 00:13:01.868
where actually policy

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00:13:01.868 --> 00:13:06.807
is pretty conservatively managed inflation
actually is better behaved than expected

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The UK is a little bit of an outlier.

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I mean, I think a lot of the inflation in
the UK is essentially because of the

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government, because of their policies.

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And underneath that, actually, the economy
is struggling.

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So the labour market's weak, wages are
coming down.

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00:13:20.343 --> 00:13:25.819
The things that have been pushing up
inflation are increases in minimum wage,

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increases in national insurance
contributions.

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00:13:29.163 --> 00:13:30.350
That's a tax effect.

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00:13:31.225 --> 00:13:32.569
And then the way that the UK...

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prices its electricity is on some, you
know, very clunky formula.

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00:13:39.940 --> 00:13:43.803
And so you end up with actually, I think,
inflation being a lagging variable in the

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UK.

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And unfortunately, we have possibly one of
the worst central banks in the world who

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spend their life

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00:13:51.241 --> 00:13:52.014
looking at historic data rather than
thinking about where we're going next.

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00:13:52.499 --> 00:13:56.327
The UK economy, I think, is likely to
weaken further.

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00:13:56.328 --> 00:13:58.467
We're going to get more tax increases.

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00:13:59.311 --> 00:14:01.983
The job market looks pretty soft.

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00:14:03.086 --> 00:14:07.907
You know, in a year's time, inflation
could be materially lower and the Bank of

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00:14:07.907 --> 00:14:09.907
England could be well behind the curve.

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00:14:09.907 --> 00:14:14.231
And actually, they were sort of expecting
a slightly worse outcome in inflation into

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00:14:14.231 --> 00:14:16.231
the latter part of the year.

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So it's not a surprise.

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John, thanks so much for your time, your
analysis.

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John Stockford is head of multi-asset
income at 91 in London.

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The views and opinions expressed in these
podcasts are those of Lindsay Williams and

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00:14:30.668 --> 00:14:32.668
various contributors and do not reflect
the policy,

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00:14:35.534 --> 00:14:39.376
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author.

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beings, these views are always subject to

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