Rudi’s View: Oil, Inflation, Growth & Stagflation

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This story features AMCOR PLC, and other companies.
For more info SHARE ANALYSIS: AMC
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

2026 is not a repeat of the 1970s, but the longer global oil supply remains interrupted, the more financial markets will start focusing on its impact on global growth.

By Rudi Filapek-Vandyck, Editor

Oil, Inflation, Growth & Stagflation

Whether we like it or otherwise, but financial markets are being held hostage by the Strait of Hormuz and the related spike in prices for oil and gas.

The uncertainty about what comes next and how quickly, or not, the global energy supply bottleneck might be resolved is keeping a firm lid on equity markets, with Australia’s major indices now down thus far for calendar year 2026.

All in all, and to the surprise of more bearish inclined market observers, the global response on markets has remained relatively muted.

No doubt, this reflects a general view the US administration is not prepared to risk the mid-term election later in the year over this ill-thought out full-frontal attack on the Iranian regime.

But a quick resolution is, of course, by no means guaranteed. A staunchly defiant new Iranian head of state is testament to that statement.

How Much Damage?

Even if this war will be over within the next number of weeks, as suggested by the US administration, today’s relative calm on equity markets might well severely underestimate the damage to supply and the world economy that is in place by then.

A recent assessment by analysts at UBS put it as follows:

• The Strait of Hormuz remains closed to the end of March (two more weeks); this might see oil priced at US$120/bbl

• Under a scenario whereby there’s no let up until late April, oil could well be priced above US$150/bbl

For good measure, there is but a valid argument to be made US president Trump is already laying the foundations for a signature TACO move, whereby he declares ‘mission accomplished’ and ceases further hostilities, but maybe things aren’t that easy and straightforward anymore?

Last week’s oil markets assessment by ANZ Bank yet again emphasised the risk for much larger damage to supply is rising and not reflected in today’s markets, be they fixed interest, commodities, energy or equities, and the clock is ticking.

By late March, ANZ analysis suggests, well shut-ins will start emerging on the back of interrupted access to electricity, water and gas, not to mention the risks for staff employed throughout the region.

Once wells are shut-in, bringing them back online is neither immediate nor guaranteed.

So the risk is real that what are at face value temporary disruptions can quickly turn into longer-lasting supply losses, even if the war ends or security conditions stabilise.

The release of emergency inventories, as already announced by the International Energy Agency (IEA) and locally the Australian government, will have a tempering impact, but it doesn’t solve the underlying problem.

And thus energy prices will then remain higher-for-longer.

The longer the disruption persists, the higher the price will rise to restore the market’s balance, ANZ predicts.

The key message from that assessment is higher oil prices are no longer solely the result of rather extreme outcomes, such as an extended closure of the Strait of Hormuz.

ANZ Bank has now made US$100/bbl its base case scenario for Q2, with the additional warning investors should not be complacent about ongoing risk to the upside.

Not A Rerun Of The 1970s

Modern day economies are by no means directly comparable with the situation throughout the 1970s.

Average oil usage has dropped by some -70% since, but oil remains important and in today’s context average household spending was already under pressure from the cost-of-living crisis.

Last week’s economic data in the US were noticeably weaker than anticipated. As pointed out by economists at National Australia Bank, US January real personal consumer spending was up just 0.1% m/m and has averaged that meagre pace for the past 3 months.

Q4 GDP growth was revised down from 1.4% q/q to just 0.7% q/q.

With such low markers, it doesn’t take much for markets to start contemplating the effect from pricier oil and gas, and other consumer expenses, and from higher bond yields, as markets respond to higher inflation forecasts, on economic growth.

The longer this situation remains unresolved, the louder the voices that warn stagflation is on the horizon.

Stagflation Has Many Faces

Let’s start with the bad news: if the world were to revisit the original stagflation definition from the 1970s, i.e. negative growth in combination with elevated inflation, there will be very few, if any, places to hide in equities.

Contrary to popular misconception, not even the energy producers themselves managed to protect their shareholders from the big bear market downswings throughout the 1970s.

That stark reality-check was once again backed-up by last week’s historical research conducted by UBS.

There won’t be many forecasters around to confidently predict the world is about to relive the oil shocks from the 1970s, but then stagflation doesn’t have to be an exact copy of back then.

Low growth and high inflation is also addressed as stagflation, and such a potential outcome is by no means fanciful.

See also: last week’s US economic data, households under multiple pressures already, equity markets trading at sizeable premia against their own historical averages.

The message for investors is that, so far, markets (and central bankers) are predominantly focused on oil’s impact on inflation, backed by widespread confidence there’s a TACO on the horizon, albeit without knowing the exact timing of it.

The longer energy markets remain disrupted, the higher the lasting impact and thus markets will, at some point, shift their focus from inflation to lower growth.

If and whenever that happens, the changes in money flows and in momentum could be nothing less than dramatic.

To prove that point: some of your traditional defensives –think REITs and infrastructure stocks– are out of favour today because higher bond yields (inflation) are depressing their valuation.

But their operational momentum might stay relatively unaffected during times of economic duress, not to mention the opposite effect from falling bond yields (lower growth).

A similar observation can be made about the technology sector, which remains under severe pressure from all kinds of narratives this year, including rising bond yields.

But once the focus shifts to dependable and reliable growth, many of those companies will instantly look a whole lot more attractive again (in particular since they’ve already sold off so much).

The pendulum switch will equally hit today’s inflation beneficiaries; miners and energy producers, in the opposite direction.

Lessons From History

Last week’s historical research by UBS confirms the above, but it also suggests there remains room for lots of in-between scenarios.

Consider, for example, history shows when economic growth is low and inflation high (above 4%) the best performing sectors are Telecom and Technology (TMT), gold miners and construction companies, with the energy sector at the bottom of the performance ranking, together with mining and banks.

But when growth is low and inflation only medium high, gold miners sit with insurance and construction companies among worst performers and energy, TMT and Industrials make up the top three of best performers.

These rankings shift quite dramatically in each variation of higher growth and lower inflation.

For obvious reasons, it’s one hell-of-a-task to identify those stocks most likely to protect investors in the months/year ahead — we don’t actually know what will be the actual context and/or market’s focus (or when that focus switches).

UBS analysts have offered their picks under two different scenarios:

-under a period of ‘hard stagflation’ for the Australian economy (i.e. negative growth (recession) and elevated inflation), UBS seeks refuge among food staples production and retailing, including:

• Amcor ((AMC))
• Coles Group ((COL))
• Rural Funds Group ((RFF))
• Region Group ((RGN)), and
• Woolworths Group ((WOW)),

as well as infrastructure-like businesses, including:

• APA Group ((APA))
• Aurizon Holdings ((AZJ))
• Cleanaway Waste Management ((CWY))
• Transurban ((TCL)),
• and Telstra ((TLS)),

plus companies with heavy exposure to government/defence and utility maintenance, including:

• Downer EDI ((DOW))
• Ventia Services ((VNT)).

-under a milder version of stagflation, with low/sluggish economic momentum and still high inflation, investors should expect leading and quality businesses to shine because of their relative resilience. Think:

• Brambles ((BXB))
• REA Group ((REA))
• Wesfarmers ((WES)),
• and WiseTech Global ((WTC)),

but UBS also includes Santos ((STO)) and Woodside Energy ((WDS)), as well as BHP Group ((BHP)) and South32 ((S32)).

Other companies mentioned include Aristocrat Leisure ((ALL)), Collins Foods ((CFK)), JB Hi-Fi ((JBH)), Scentre Group ((SCG)), Sigma Healthcare ((SIG)), and TPG Telecom ((TPG)).

-UBS analysts emphasise most stocks will suffer under stagflation, even in a milder form, but some stocks are likely to suffer more, such as companies exposed to the residential property cycle, including:

• Mirvac Group ((MGR))
• Pexa Group ((PXA)),
• and Stockland ((SGP)),

as well as companies like Nine Entertainment ((NEC)) and Seek ((SEK)) that would be hit through job losses and week property (advertising) markets.

Consumers trading down could well negatively impact the likes of:

• Bega Cheese ((BGA))
• Breville Group ((BRG)),
• and Treasury Wine Estates ((TWE)), and also:
• Adairs ((ADH))
• Harvey Norman ((HVN))
• Super Retail ((SUL)),
• and Temple & Webster ((TPW)),

as well as travel companies, including Flight Centre ((FLT)) and Qantas Airways ((QAN)).

Note that historical precedents of hard stagflation scenarios have seen the Australian share market lose -50% of its value (hence we are all hoping that scenario remains firmly off the table).

Defence & Rare Earths

As per always, there is a lot more going on in financial markets than energy and inflation. On Monday, Ord Minnett released a special report on counter-drone and rare earth opportunities for local investors.

The investment thesis is the current battlefield in Iran is highlighting the significance of drones versus much more expensive rockets and missiles, as well as the strategic importance of rare earths.

Ord Minnett highlights the following:

• Electric Optic Systems ((EOS)), rating Speculative Buy, target $12.95
• Viridis Mining & Minerals ((VMM)), Speculative Buy, target $4.70
• Meteoric Resources ((MEI)), Speculative Buy, target $0.40
• Brazilian Rare Earths ((BRE)), Speculative Buy, target $7.50
• Northern Minerals ((NTU)), Speculative Buy, target $0.05

In addition, Ord Minnett analysts have added the following two to their Analysts’ Conviction List:

• Breville Group ((BRG))
• Service Stream ((SSM))

For the full list (and more): see Rudi on Thursday on the website on Thursday.

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