Best Investments During Stagflation: What the Data Says for UK Investors
- Alpesh Patel
- 4 days ago
- 5 min read
Updated: 1 day ago
Best Investments During Stagflation
Stagflation is the investment environment that most portfolio strategies were not built for.
The classic 60/40 portfolio — 60% equities, 40% bonds — was developed in an era when equities and bonds moved inversely. Rising inflation breaks that relationship: when inflation is high and persistent, both can fall simultaneously, as rising interest rates depress bond prices and compress equity valuations. In 2022, the 60/40 portfolio delivered its worst annual return since 1937, falling approximately 17% in dollar terms.
In 2026, the macro environment for UK investors remains complex. The Bank of England is navigating a delicate path between residual inflationary pressure and an economy growing below its long-run trend. It is not classic stagflation — but it shares several of its characteristics. Understanding which investments have historically performed best in these conditions is analytically important for any serious investor.
Alpesh Patel OBE is a hedge fund manager, Bloomberg TV alumnus, Financial Times author, and former Visiting Fellow at Corpus Christi College, Oxford. This analysis draws on historical data from the 1970s stagflationary period, post-2020 inflation research, and current Bank of England and ONS data.
What Stagflation Does to Asset Classes: The 1970s Evidence
The canonical reference point for stagflation investing is the 1970s. Between 1972 and 1982, the US and UK experienced sustained periods of simultaneous high inflation and below-trend growth following the OPEC oil shocks. Research from Man Institute and Goldman Sachs examining this period identifies a consistent hierarchy of asset performance:
Commodities (energy and precious metals): strongly outperformed. Gold rose approximately 1,300% in nominal terms between 1971 and 1980.
Real assets (property, infrastructure): generally maintained real value as inflation eroded cash.
High-quality equities with pricing power: companies with strong brands, essential products, and the ability to pass cost increases to customers outperformed significantly.
Government bonds: delivered significantly negative real returns as inflation eroded fixed coupon payments.
Growth equities (high multiple): severely underperformed. Rising discount rates compressed valuations of companies with earnings weighted to the future.
The 2022 Evidence: Stagflation in a Modern Portfolio Context
The 2022 environment provided a modern test of stagflationary dynamics. The S&P 500 fell 19.4%. The Bloomberg Global Aggregate Bond Index fell 16.2%. In contrast, the S&P GSCI Commodity Index rose 26%.
Energy stocks rose over 60%. Within equities, high-quality value stocks significantly outperformed high-multiple growth stocks — precisely the dynamic that the GIP framework’s CROCI, PEG, and Calmar screens are designed to capture.
The UK Macro Picture in 2026: Is Stagflation a Real Risk?
The Bank of England’s Monetary Policy Report (February 2026) projects UK GDP growth of approximately 0.75% for 2026, below trend. CPI inflation remains above the 2% target at approximately 3.1% (ONS, February 2026).
Wage growth is running at 5.5–6%, sustaining services inflation. This is not the 1970s — but the combination of below-trend growth and above-target inflation shares the essential character of mild stagflation.
Goldman Sachs’ 2026 macro outlook notes that global equity markets face a more complex environment than 2023–2024, with earnings growth needing to do more work to sustain valuations at current multiples. Their strategists favour quality and value over pure growth — consistent with the academic evidence from previous stagflationary periods.
Equity Characteristics That Historically Outperform in Stagflation
Pricing power: essential consumer staples, healthcare, dominant platforms with subscription revenues.
High cash return on capital (high CROCI): less dependent on external financing and more resilient when borrowing costs rise.
Low valuation (low PEG): less exposed to the rate-driven multiple compression that damages high-multiple growth stocks.
Energy exposure: directly benefits from the commodity price inflation that typically characterises stagflationary periods.
These are precisely the characteristics the GIP framework screens for. It does not attempt to predict macro regimes - it consistently selects companies with the characteristics that have proven resilient across multiple market environments, including stagflation.
What to Avoid in Stagflationary Conditions
Long-duration government bonds underperform severely as real yields rise. Highly leveraged companies face dual pressure from rising financing costs and slowing demand.
Speculative growth equities with high P/E ratios are particularly exposed to rate-driven multiple compression. Cash delivers negative real returns whenever inflation exceeds the savings rate.
Frequently Asked Questions: Investing During Stagflation
Is the UK in stagflation in 2026?
The UK is experiencing below-trend growth (approximately 0.75% GDP forecast for 2026 per Bank of England) with above-target inflation (CPI approximately 3.1%, ONS February 2026). This is a mild stagflationary environment. The IMF and OBR have flagged persistent services inflation and weak productivity as the key risks to UK growth in 2026–2027.
Is gold a good investment during stagflation?
Historically yes — gold rose approximately 1,300% in nominal terms between 1971 and 1980. In 2022–2024, gold outperformed many equity indices in GBP terms. However, gold produces no cash flow and can be highly volatile. It is typically held as a hedge, not a primary return driver.
Should I hold bonds during stagflation?
Long-duration government bonds are among the worst-performing assets in classic stagflation. Inflation-linked bonds such as UK index-linked gilts provide better protection. Short-duration instruments are less exposed to duration risk but still deliver negative real returns when inflation exceeds the yield.
Which equity sectors perform and are the best investments during stagflation?
Historical evidence from the 1970s and 2022 consistently shows energy, consumer staples, healthcare, and materials as the strongest equity sectors. These share pricing power and/or direct commodity exposure. Technology and consumer discretionary — sectors with high growth multiples — have historically underperformed.
How does a quantitative investment framework handle stagflation?
The GIP framework does not attempt to predict macro regimes. It consistently selects companies with high cash returns (CROCI), reasonable valuations (PEG), and strong downside protection (Sortino, Calmar). These characteristics have proven resilient across multiple market regimes — including stagflation — because they are intrinsic to business quality, not dependent on a particular macro environment.
If you want to understand how the GIP quantitative framework positions a portfolio for the current macro environment, book a free portfolio review at campaignforamillion.com.
Sources & Further Reading
Bank of England — Monetary Policy Report, February 2026. bankofengland.co.uk/monetary-policy-report
ONS — CPI Inflation February 2026 and UK GDP growth data. ons.gov.uk/economy/inflationandpriceindices
Man Institute — ‘Investing in Stagflation’ (2022). Research on asset class performance in stagflationary periods. man.com/maninstitute
Goldman Sachs Asset Management — 2026 Macro Outlook and equity strategy. gsam.com/content/gsam/global/en/insights
AQR Capital Management — ‘Factors in the Macroeconomic Environment’. Research on quality and value factor performance across inflation regimes. aqr.com/insights/research
Financial Times — Stagflation coverage and UK inflation outlook 2026. ft.com/economics
IMF — World Economic Outlook (April 2026). Global growth forecasts and inflationary risk assessment. imf.org/en/Publications/WEO
Morgan Stanley Research — Equity strategy in an inflationary environment. morganstanley.com/ideas/investment-strategy
Disclaimer: This article is for educational purposes only. All investing carries risk. Macroeconomic forecasts are inherently uncertain. Past performance is not a reliable indicator of future results.
Alpesh Patel OBE