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Top economist El-Erian says stagflation is ‘unavoidable’ — here’s why it’s far worse than hot inflation and 3 ways to protect against it

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Top economist El-Erian says stagflation is ‘unavoidable’ — here’s why it’s far worse than hot inflation and 3 ways to protect against it
Top economist El-Erian says stagflation is ‘unavoidable’ — here’s why it’s far worse than hot inflation and 3 ways to protect against it

With inflation near 40-year highs, many consumers are feeling the pain of rising price levels. But inflation isn’t the worst thing that can happen.

In an interview with Bloomberg, Allianz chief economic advisor Mohamed El-Erian warned about stagflation — an economic condition marked by high inflation, but without the robust economic growth and employment that usually come with it.

“What is unavoidable is stagflation. And we’ve seen growth coming down, and we're seeing inflation remaining high,” he says. “And the Fed is finally catching up to developments on the ground, but it still has some way to go.”

That does not bode well for stock market investors.

“We've gone sequentially through pricing in inflation risk and interest rate risk to pricing in tighter liquidity. What we haven't priced in yet, is a significant slowdown in growth.”

But even in a period of stagflation, a handful of sectors can still make you money.

Let’s take a quick look at three of them.

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Utilities

Utilities usually have the ability to withstand economic shocks. Whether boom or bust, people will still need to heat their homes in the winter and turn the lights on at night.

The business also has high barriers to entry.

It’s extremely costly to build the infrastructure required to distribute gas, water, or electricity. Plus the industry is highly regulated by the government.

As a result, utility companies usually operate as monopolies or oligopolies in their respective operating regions. And due to the recurring nature of the business, the sector is known for providing reliable dividends to shareholders.

The best part? Utility companies like Consolidated Edison (ED), American Water Works (AWK), and NextEra Energy (NEE) have been increasing dividends year after year.

Food

Next, we have the food industry, which includes grocery stores, food distribution companies, and food producers.

No matter where we are in the economic cycle, people still need to eat.

Case in point: While the COVID-19 pandemic presented serious challenges for numerous brick-and-mortar businesses, supermarket giant Kroger (KR) continued to thrive.

Kroger shares have climbed 6% in 2022, in stark contrast to the broad market’s double-digit decline.

Then there’s PepsiCo (PEP), which has 23 brands that each generate more than $1 billion in estimated annual retail sales. Sure, inflation could drive up costs, but management plans to take “good, strong price increases” to counteract those pressures.

In the food industry, higher costs are usually passed on to consumers.

Apartments

Real estate is a well-known hedge against inflation. As the price of raw materials and labor goes up, new properties are more expensive to build. And that drives up the price of existing real estate.

But not all properties are the same.

To prepare for stagflation, look into apartments.

No matter how much economic growth slows down, people need a place to live. And with real estate prices rising to unaffordable levels in many parts of the country, renting has become the only option for many people.

You can always buy an apartment building yourself, find tenants and collect the monthly rent checks. Of course, apartment-focused REITs can do that for you.

For instance, Camden Property Trust (CPT) owns, manages, develops and acquires multifamily apartment communities. It has investments in 170 properties containing 58,055 apartment units across the U.S. and offers an annual dividend yield of 2.7%.

Essex Property Trust (ESS) invests in apartments primarily on the West Coast. The REIT currently yields 3.1%, backed by its ownership interest in 253 apartment communities — in California and Seattle — totaling approximately 62,000 units.

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