Stagflation refers to a situation where there is inflation, but also wage-stagnation/rising unemployment and low growth in the economy. The worst form of it could be a situation when there is inflation but growth shrinks. This is one of the most uncomfortable conditions for any economy as this would have a ripple effect on investors and the stock market.
Diversification is the key to positioning money in 2026. Different asset classes like commodities, real estate, equity, bonds /fixed income securities etc. come with their own risk-return matrix. Diversifying helps one reduce risk during these uncertain times and generate a reasonable return.
During stagflation, money gets re-allocated in the market. Hence, a few of the asset classes which usually do not come across as attractive options may become the flavour of the season. The existing situation is indeed a challenging one which has been aggravated due to the US tariff policy, but the Iran-Israel war and the consequent impact on oil prices has worsened it.
The current geopolitical crisis could trigger a socio-economic crisis for many countries as economies do not work in silos these days but are deeply interconnected and any adverse impact in one country could have a ripple effect.
Let’s understand how the dynamics play out during stagflation to appreciate why diversification could be the answer to the situation. Inflation makes raw material costs go up, which increases the production cost for the business. Simultaneously, the Central Bank exercises monetary control by increasing interest rates to encourage people not to spend but to save.
High interest rates make the bond market attractive, but equity loses its sheen as higher interest rates would mean higher borrowing costs coupled with higher cost of production, resulting in lesser profits for companies and possibly lower growth. Lower profit and lower growth may culminate in lower dividends.
Thus, investors might shy away from equity and invest in bonds. Similarly, commodities like gold, which are seen to rise when oil prices increase, will be able to beat inflation, promising better returns than the stock market.
To prepare better, there are a few tips which investors could consider to position money in 2026.
Tip 1 – Maintain some liquidity. Though it is not glamorous to hold cash, in uncertain times like this it will help in re-balancing if there are losses without having to sell an asset at a loss.
Tip 2 – Divert funds in commodities like gold, silver and crude oil. These will outpace inflation and ensure a good return.
Tip 3 – When opting for equity, select stocks of companies with robust credentials and a good track record of paying dividends. This could be a good strategy during equity volatility.
Tip 4 – Real estate can be a good bet now as prices are stable, but when the economic scenario improves, appreciation is expected.
Tip 5 – Diverse MFs (mutual funds) or ETFs (Exchange Trade Funds) are fascinating as they will spread the risk across various sectors, reducing the impact of any single industry’s downturn. This can also help in selecting the sectors which may perform better during stagflation. For example, stocks of companies in food, healthcare, and energy are expected to do better than hospitality and tourism stocks.
Tip 6 – Avoid panic selling in Equity or MFs. Remember they show good returns over a long time horizon.
Tip 7 – High yield bonds can provide returns that keep pace with rising inflation. This is not a time to make big bets, but focus on capital preservation. As purchasing power reduces due to inflation, one must make opportunistic moves instead of chasing growth at all costs. Act strategically to safeguard investment and returns during these turbulent times.
(Disclaimer: The article has been authored by Dr Kirti Sharma, Associate Professor – Finance & Accounting, Great Lakes Institute of Management, Gurgaon. Views expressed are personal.)