FAST PODCAST: Is stagflation really back and what would it mean for investors? | Pendal Group
Hi there! Welcome to the new look Pendal website... Take a two minute tour to see what we’ve changed.

Mainstream Online Web Portal

Investors can view their accounts online via a secure web portal. After registering, you can access your account balances, periodical statements, tax statements, transaction histories and distribution statements / details.
Advisers will also have access to view their clients’ accounts online via the secure web portal.

FAST PODCAST: Is stagflation really back and what would it mean for investors?

Stagflation is a buzzword in global markets at the moment. Is it really back to the 1970s? And what would that mean for investors? Pendal portfolio manager Amy Xie Patrick explains in this fast podcast

Listen to the podcast above or read the transcript below

Interviewer Sean Aylmer: Stagflation. It’s a word we hadn’t heard for a long time, but in the last few weeks or months, suddenly it’s getting an airing again. What’s behind that?

Amy Xie Patrick, portfolio manager, Pendal Income and Fixed Interest team:

Absolutely. I think the last time we heard about the word stagflation, and when it really was a theme, was when we thought about the oil shock crisis that happened in the ‘70s.

I think what’s happened again this time round is that commodity prices, and these energy shortage stories — all the way from Europe, throughout China and hitting a lot of emerging markets as well — is making people think we’re going through the same set of circumstances again, which could trigger stagflation this time round.

But I do think that for stagflation you need really growth to stall – not just slow – and you need inflation to be skyrocketing.

I think stagflation as a word to characterise what we’re going through right now is a bit of an exaggeration.

Interviewer: Okay, so they’re overplaying the slowdown in growth and they’re overplaying the rise in prices – and that’s why we’re hearing stagflation?

Amy Xie Patrick Exactly. I think what’s behind the rising prices is several fold.

Obviously because of the Covid pandemic and the crisis that ensued, there was a massive drop-off in demand.


More Pendal podcasts


Whenever there’s such a massive drop-off in demand, the capacity always adjusts. The same goes for commodity capacity. The same goes for energy and fuel capacity.

When that capacity falls, it takes a long time to come online again. Furnaces don’t just get switched back on. Miners don’t manage to suddenly turn on a lot of capacity very easily.

As a result, as you’ve seen demand recover from the depths of the pandemic, the supply hasn’t been able to really catch up.

So this is the first point that goes against this thesis of stagflation.

Demand is recovering. Vaccination rates are starting to really climb globally, even for those parts of the world that were really lagging at the beginning of the vaccination drive.

And as we see economies continue to open up, that demand recovery will continue to underpin some of the overall growth recovery that we’re seeing globally.

So by no means do I see a picture where growth is suddenly stalling or going backwards.

And then on the inflation side, it’s not just supply bottlenecks that are causing the fuel price rises and the commodity price rises. The demand side of the picture also seems pretty robust.

On the supply side, we have been told by a lot of policymakers in the central banks, not to worry about inflation because it is transitory. But some of them are starting to scratch their heads and think about how transitory.

I do think it probably leaves you with an inflation outlook that is slightly less comfortable than what we’ve been used to for at least the past five years.

Inflation – both headline and core – is likely to sit at or slightly above what central banks have as their targets.

Australia perhaps is one of the exceptions, because the RBA does target the middle of their ranges – 2.5 per cent as opposed to the rest of the world which largely targets 2 per cent.

But overall, just because inflation will sit at a slightly higher level than what we’ve been used to for the past five years, it doesn’t mean an inflation surge that suddenly becomes out of control.

Find out about

Pendal’s Income and Fixed Interest funds

Interviewer: So bringing that back to portfolio construction, if I’m hearing you right, we still have the same problem that we had six months ago. We may still have the same problem in six months time.

Amy Xie Patrick: Absolutely. You may not see yields go back to their all-time lows.

But by no means, are you going to see yields come back to the comfortable 4 per cent, 5 per cent or 6 per cent ranges where we can happily accrue a loss of income from our traditional fixed income portfolios.

Therein lies the problem for a lot of fixed income investors globally – and in fact portfolios as a whole.

If you’ve got still a lot of risk in your portfolio that is much more equity-beta driven, how then do you offset some of that risk with something that can be negatively correlated when those equity markets get into trouble – and in the meantime is still able to generate you sufficient income to offset some of those transitory or structural inflation concerns that are coming up?

I think that is the real challenge right now for fixed income portfolios.

For us at Pendal it really means thinking about using all the tools available to you in your toolkit.

Breaking down those traditional thinkings about the boundaries between asset classes and the boundaries between bonds and equities.

Thinking about where you can derive income from and where you can best use your levers to generate that alpha and those returns for still a very low-yielding world.

Interviewer: So how should we think about portfolio construction?


Amy Xie Patrick:
Naturally it means you get pushed further out along the risk curve within fixed income.

You rely less on high-quality government bonds in the portfolio to provide you with that income, but you still leave enough of an allocation to those government bonds for safety.

For times, when you do get that sudden knee-jerk drop in equity market prices.

In the interim you search for income further along the risk curve in areas such as high-quality corporate bonds, but also diversifying into assets such as emerging market sovereign credit.

And that is ultimately the philosophy of how we make our income products.

The idea is to be able to generate steady enough income, that won’t be jeopardised by the quality and default risks within your income-generating engine of the portfolio. And still keep some of that protection going with an allocation to government bonds in the background in case you need it.


About Amy Xie Patrick and Pendal’s Income and Fixed Interest team

Amy is Pendal’s Head of Income Strategies. She has extensive experience and expertise in emerging markets, global high yield and investment grade credit and holds an honours degree in economics from Cambridge University.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia. Pendal won the 2023 Sustainable and Responsible Investments (Income) category in the Zenith awards. In 2021 the team won Lonsec’s Active Fixed Income Fund of the Year Award.

The team oversees some $20 billion invested across income, composite, pure alpha, global and Australian government strategies.

Find out more about Pendal’s fixed interest strategies here

About Pendal Group

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here


This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at October 12, 2021.

This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance.

Any projections contained in this article are predictive and should not be relied upon when making an investment decision or recommendation. While we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.

Keep updated
Sign up to receive the latest news and views