Stagflation is back. It must be if the Bank of England has woken up to the danger (it’s usually late in picking up on these things). That’s bad for the economy, but UK shares may show more resilience than many anticipate, especially top FTSE 100 income stocks.
Stagflation happens when prices rise and the economy stagnates. Inflation is set to hit 10.25% in Q4, while the economy could shrink at the same time, according to the BoE. It’s the worst of both worlds.
The Bank of England has to walk a tightrope between hiking rates fast enough to curb inflation, but without crashing the economy. Judging by its recent efforts, it will probably call it wrong!
During periods of stagflation, business costs rise, which squeeze profit margins. Firms go out of business, job losses grow. Consumers have less money to spend while goods and services get more expensive. It’s a nasty spiral.
The FTSE 100 is coming into its own
This explains why growth stocks such as US technology giants have had a rotten year, with the Nasdaq down over 20% (and losing 10%+ over 12 months). Rising inflation erodes the value of future earnings in real terms. Investing for growth tomorrow rather than value today suddenly isn’t so exciting as stagflation sets in. Yet while US shares flounder, the FTSE 100 has held firm. It’s down 1.49% year-to-date, and up almost 4% in a year, to put it among the best performing markets globally.
The FTSE 100 fell out of favour during the growth stock boom. Now it’s back in fashion, because it’s stuffed with top ‘value’ stocks. These are companies with solid earnings and attractive dividends, that have been overlooked by the market so trade at relatively low valuations. They might be housebuilders, healthcare companies, utilities, insurers, and others at the safer-but-stodgier end of the market. As stagflation looms, investors are appreciating their merits. Here are some I like.
Mining giant Rio Tinto looks like a good stock to hold in stagflationary times. It trades at just 5.1 times earnings but yields an inflation-busting 11.73%. This top income stock should also benefit from rising commodity prices, which could climb even higher as the EU tightens sanctions on Russia.
These income stocks may beat the stagflation threat
Another renowned FTSE 100 income stock, tobacco giant Imperial Brands, also looks like a good stagflation hedge. It yields 8.31%, giving inflation a run for its money, and is valued at just 6.8 times earnings. The risk is that sales will inexorably fall as smoking falls out of favour. Housebuilder Persimmon, is valued at just 8.4 times earnings and yields 11.22%. Higher interest rates may hit the property market, but supply is still outstripping demand.
Insurer Phoenix Group Holdings is a favourite FTSE 100 income stock of mine, and now combines an undemanding P/E ratio of 6.8 with a tempting 8.3% dividend yield. I don’t expect much price growth, but I like the income.
These are just the first FTSE 100 income shares to jump out at me. Before buying, I’d need to take a closer look at the underlying businesses, to see their opportunities and threats. I’d aim to hold for the long term, and draw those dividends as income when I finally retire. With luck, 2020s stagflation will just be a bad memory by then.
