Tariff impact: how to invest during stagflation

The launch of trade tariffs by the United States on its international partners has raised fears we could be heading into a bout of ‘stagflation’.

A mix of stagnant growth and inflation, stagflation can be particularly painful because the uncertainty that comes with a downturn in the economy is compounded by the erosion of wealth through higher prices. It’s a combination that markets hate, as evidenced by the steep falls in US shares this year.

• Get updates on markets, ISA funds, pension saving and much more

For investors, the volatility has been uncomfortable - but not a total surprise. Occasional market falls - even steep ones - are the price investors pay for the superior long-term returns that investments offer over risk-free assets like cash. After a long period of strong gains before this year, some pull back is no big surprise.

Nonetheless, many investors will be looking for a plan to navigate stagflation. Here we bring together some of the effects that could emerge if stagflation arrives - with ideas for investments placed well to take advantage.

Note - wholesale moves in and out of investments to capitalise on short term price movements can add risk to your investing, while buying any of the investments listed here now means buying them after their prices have moved amid the recently volatility. As always, investing for the long-term in a well-diversified spread of assets is advised.

• See our current offers to help make your money go further

Government bonds - a haven once again?

After a period in which government bonds have disappointed, the recent sell-off in stock markets has seen them once again assume their role as portfolio protector.

In theory, stagflation should present a challenge to fixed-income assets like bonds because it comes with higher inflation, which erodes the value of the income they pay over time. However, high-quality government bonds begin to look very attractive when returns from riskier assets, like shares, are in question. Unlike corporate bonds - those issued by companies - that face a raised risk of default during a recession, government bonds carry very low default-risk.

The yield on a bond falls when its price rises. The yield on 10-year American government bonds, or ‘treasuries’, is now just a fraction above 4%. It was 4.5% as recently as 18 February, the day before the peak in the S&P 500 stock market index.

Yields on similar bonds issued by other governments have also fallen. Ten-year ‘gilts’ – British government bonds – now yield 4.6%, a fall of about 7 ‘basis points’ compared with yesterday. A basis point is 1/100th of a percentage point. German and French 10-year bond yields fell by 9 and 6 basis points respectively.

The iShares Overseas Government Bond Index Fund tracks an index of global government bonds for a low charge of 0.11%.

• More on iShares Overseas Government Bond Index Fund

The Colchester Global Bond Fund offers a portfolio of mainly government bonds picked by a professional manager for a higher charge of 0.6%, with a particular focus on investments that are sought after in times of uncertainty.

• More on Colchester Global Bond Fund

Gold to continue to shine?

Gold is already at record highs thanks to the uncertainty injected into financial markets this year. The metal tends to perform best when fear is at its highest and has a track record of holding its value when other assets are vulnerable to falls.

A straightforward way to gain exposure to gold is via the iShares Physical Gold ETC. For a low cost of 0.11% it will closely replicate the performance of the gold price.

• More on iShares Physical Gold ETC

Another option is to by a fund of gold mining company shares, such as the Ninety One Global Gold Fund. The fund is correlated to movements in the gold price but is affected by other factors as well. The result is a slightly more volatile return, with movements in the gold price amplified in the fund because mining companies have significant fixed costs, so any rise in the price they can sell their gold for equates to a larger percentage rise in their earnings.

• More on Ninety One Global Gold Fund

Cash on the sidelines

Canny investors may well be thinking about building a cash pile at the sidelines of their portfolio - and to deploy it to take advantage of further falls in stock markets.

With interest rates still elevated the return on cash remains attractive to those looking for a risk-free way to beat inflation. While inflation could rise as a result of trade tariffs, it is currently still possible to get a return from cash that is running ahead of price rises.

An increasingly popular cash option is to move cash savings to an investment account but utilise assets which produce a cash-like return while rates remain somewhat attractive. That allow you to take advantage of the real return from cash while it lasts, but also leave you ready to switch to investments if and when that suits you.

Cash funds or money market funds held inside investment accounts can do this job. The Fidelity Cash Fund is the best-selling cash fund on the Fidelity Investing platform and is forecast to produce 4.96% of income in the coming year - or 4.61% after deducting the Fidelity platform charge of 0.35%. Please note this yield could go down or up and is not guaranteed.

• More on Fidelity Cash Fund

You can also earn interest on money held in your investment account even if you don’t invest it into a cash fund. Fidelity offers interest on cash and you can learn more about how we manage your cash here.

Dividends as a defence

Some companies in the stock market are naturally more resistant to economic upheaval because they operate in sectors that are less dependent on strong consumer confidence and demand.

These companies are often mature with a history of rewarding shareholders through dividends. This can add some ballast to the overall return the generate for investors.

Fidelity Global Dividend is a fund which looks for companies paying a reliable and rising dividend income. Unlike many global equity funds, it has a relatively small allocation to the US market - around 30% - meaning it has avoided the worst of the falls that have hit American shares this year.

• More on Fidelity Global Dividend Fund

Limiting the downside

Some investment funds do their best work when markets are rocky, aiming to protect against downside risks most of all.  

The Pyrford Global Total Return Fund is designed to minimise the impact of falling markets. It aims for low volatility and to try to minimise falls. It invests in a range of asset types, combining investments in shares, bonds and cash so is a good option for investors unsure about blending different assets together for themselves.

The allocation to stock markets is usually below 50% and is currently just 30%. Most of the money is in bonds. It has very low exposure to the US – less than 4%.

• More on Pyrford Global Total Return Fund

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. The value of shares in money market funds may be adversely affected by insolvency or other financial difficulties affecting any institution in which the fund's cash has been deposited. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. Fidelity Global Dividend Fund invests in a relatively small number of companies so may carry more risk than funds that are more diversified. There is no guarantee that the investment objective of any Index Tracking Sub-Fund will be achieved. The performance of the sub-fund may not match the performance of the index it tracks due to factors including, but not limited to, the investment strategy used, fees and expenses and taxes. The Key Investor Information Document (KIID) / Key Information Document (KID) for Fidelity and non-Fidelity funds is available in English and can be obtained from our website at www.fidelity.co.uk. Please note that the funds mentioned here and the Select 50 are not a personal recommendation for you. If you are unsure about the suitability of an investment you should speak to one ofFidelity’s advisers or an authorised financial adviser of your choice.