Stagflation and the Risk to Portfolios

Better Portfolio solutions than the old 60/40

Matthew Walker | September 2025

The Return of Stagflation

Stagflation - a toxic mix of slow growth, persistent inflation, and policy constraints - was the defining economic challenge of the 1970s. It nearly destroyed traditional portfolio structures and tested every investor’s resolve as bonds collapsed, and equities traded down to single digit P/E’s.

Now, after decades in which deflationary forces (globalisation, demographics, technology) kept inflation low, many market participants thought stagflation was consigned to history.

But the conditions for its return are now obvious:

• Structural inflation pressures driven by public policy wage rigidity, supply side changes, energy transition bottlenecks, high debt, high fiscal spending and currency debasement.
• Supply-side shocks from geopolitical ructions and interventions, structural deglobalisation, and climate-related policies and escalating energy transition costs.
• High debt overhangs that limit how aggressively central banks can fight inflation by raising interest rates without destabilising the status quo, growth and the financial system.

The OECD (2024) noted that productivity growth remains stubbornly weak at the same time as input costs stay elevated while the IMF’s World Economic Outlook (April 2025) cautioned that “the balance of risks is skewed toward stagflationary outcomes in advanced economies”.

Recent economic figures - private sector jobs losses, low productivity and persistent inflationary pressures - show that stagflationary pressures are here and it’s time to adapt portfolios before it’s too late.

What Happens to the 60/40 Portfolio in Stagflation?

For decades, the 60/40 mix of equities and government bonds has been the workhorse of portfolio construction. It worked beautifully when inflation was falling and bond yields provided both income and diversification - but that cycle has now ended.

In stagflationary conditions, both sides of the 60/40 portfolio come under pressure:

1. Equities Struggle
   • Stagnant real growth limits earnings expansion.
   • Persistent inflation erodes margins and compresses valuations.
   • Historically, the 1970s saw real equity returns flat to negative for much of the decade.
2. Bonds Fail as a Hedge
   • Inflation erodes fixed income purchasing power.
   • Yields rise, prices fall - meaning bonds lose value at the same time equities do, removing diversification benefits.
   • In the 1970s, US Treasuries lost over 30% of their real value over the decade.

The net result: the traditional 60/40 portfolio is poorly suited to this environment- providing neither protection nor meaningful growth.

Fortunately, there is a better way, and history, forgotten by most, provides the answers.

Dynamic Asset’s Differentiated Approach: Dynamic Asset Allocation

At Dynamic Asset, we approach portfolio construction cognisant of these new realities and the return of stagflation and currency debasement. Our framework is built around Dynamic Asset Allocation (DAA), rather than a static split between equities and bonds. We are very different from the indexed approach, choosing to avoid overvalued assets in favour of selective ownership of those that work in this new economic environment, including a broader mix of strategies and asset classes.

Here’s what sets DAA apart:

• Adaptive, Not Static: Traditional 60/40 portfolios rely on historical correlations between equities and bonds, which break down in stagflation. DAA constantly adjusts exposures to optimise the portfolio and reflect current conditions, rather than relying on outdated assumptions.
• Hard Assets Become Core, Not an Afterthought: Commodities, precious metals, and real assets are embedded as structural components of our portfolios, providing both diversification and returns. These assets have historically thrived in stagflationary periods and are already delivering for us as the world wakes up to the new economic reality.
• Multi-Asset and Mult-Strategy Breadth: We expand beyond equities and bonds into alternatives and real assets that can generate returns when mainstream markets falter. We generate returns from active management and rebalancing regularly, crucial when longer term returns may be much lower overall.
• Risk Management First: DAA is designed not just to capture growth, but to preserve capital and adapt to adverse cycles, including stagflation. When we perceive the environment changes, we change the portfolio.

Ours is a fundamental difference in philosophy and understanding of the economic paradigm. While 60/40 investors can only hope what has worked in the past will work today, we recognise the economic paradigm has changed and lengthen our historical understanding of the optimal portfolio construction. We realise that diversification and returns from real assets has become essential and therefore must become a meaningful part of our portfolios. We adopt a forward-looking adaptive and risk-centric approach suited to today’s new economic paradigm and the persistent risks of stagflation, structural inflation and fiat currency debasement.

The Evidence So Far

Our own results support this adaptive approach. Over the past 12 months, the Dynamic Asset Wealth Builder portfolio has returned +40.66%, while the Wealth Protector portfolio delivered +25.79%.

These results were achieved through disciplined, forward-looking portfolio management - identifying opportunities early, diversifying beyond traditional assets, and actively managing exposure to risk.

Conclusion: Resilient by Design

Stagflation is not inevitable, but likely for now and the probability is far higher than at any time in the last four decades with stagflationary effects already upon us. For investors tied to traditional 60/40 portfolios, this likely means years of suboptimal returns, frustration, volatility and missed opportunities.

At Dynamic Asset, our DAA-led approach is built for precisely these conditions. By incorporating hard assets, real diversification, and active allocation, we create portfolios that are resilient by design, ready for today and delivering today. We are not reliant on outdated assumptions in an economic paradigm that is no longer with us.

While nearly everyone is there is no need to be stuck with static solutions, while crowded to static benchmarks that no longer work. We help our investors navigate the real world as it is, with differentiated, undervalued, productive and carefully considered assets combined into carefully considered and effective return generating portfolios. For our investors, stagflation becomes an opportunity, instead of a dead end.

References

• IMF World Economic Outlook, April 2025
• OECD Economic Outlook, 2024
• Historical US asset class performance, 1970s (various academic studies)

To find out about how our range of differentiated SMA portfolios and investment strategies can help your advice business manage your client portfolios, Contact Us today. 

Disclaimer 

This material has been prepared by Dynamic Asset Consulting Pty Limited (ABN 82 079 145 298, AFSL 502623) of Level 20, 56 Pitt Street Sydney NSW 2000. Any content provided in this Report is for general information purposes only. It is not personal advice and does not take into account the investment objectives, financial situation or needs of any person. Please seek specific advice before making a decision in relation to any investment. Before making any decision about any product you should obtain a Product Disclosure Statement (PDS) or Investment Mandate (IM) document for further information. A copy of our PDS or IM is available from your adviser or by contacting us through our website at www.dynamicasset.com.au