Stagflation: How to position an ASX stock portfolio

Yesterday, we discussed the concept of ‘stagflation’, what it is, and why the global economy might be about to face its first significant bout of it since the 1970s. Today, we will expand on that by looking at its potential impacts on an ASX stock portfolio, and how investors can prepare for that risk.

It’s well worth taking a moment, at least in my completely unbiased opinion, to dive into yesterday’s piece. But if you want the ‘tldr’ version, stagflation refers to the phenomenon where an economy experiences persistently high inflation at the same time as it suffers from stagnant or falling economic growth and rising unemployment. Stagnant growth plus sticky inflation equals stagflation.

Historically, periods of stagflation have been rare occurrences across the advanced economies of the world. The last major stagflationary period occurred in the 1970s, and was sparked by a series of oil shocks. It doesn’t take a lot of imagination to work out why investors are again worried about stagflation in 2026.

So if Australia and other major economies of the world do enter a period of stagflation, what does this mean for investors? That’s what we’ll be talking about today.

Rising prices, stagnant growth

Stagflation represents a double-whammy of risk to ASX stocks. Companies have to manage a low-growth economy that may see rising unemployment, potentially high interest rates, and depressed consumer confidence. At the same time, they must manage the impact of sticky inflation and perpetually rising costs. It’s the exact opposite of what we could describe as ideal business conditions.

Under a stagnation-riven economy, most businesses will suffer, and only the companies of the highest calibre will manage to consistently compound their revenues and profits. It’s these businesses that ASX investors should focus on identifying and investing in.

Fortunately, we already know the playbook that is best employed here. It comes from none other than legendary investor Warren Buffett. Buffett has long touted the benefits of investing in companies that possess a wide economic moat. This term, which Buffett himself coined, refers to an intrinsic competitive advantage that a company can possess, which helps it ward off both competition and destructive economic forces.

This could come in the form of a strong, loyalty-commanding brand, a low-cost advantage of production, or making a good or service that customers find difficult to avoid buying. Most of the companies that Buffett invested in at Berkshire Hathaway, including Coca-Cola, Apple and American Express, possessed at least one of these characteristics.

Its these companies that, at leas tin my view, are best positioned to survive, and even thrive, in a stagflationary economy.

Stagflation stock picks?

ASX investors might wish to take a look at the holdings of the VanEck Morningstar Wide Moat ETF (ASX: MOAT), or the ETF itself, for some ideas in this vein. I would also argue that many of the ASX’s top blue chips how clear signs of possessing at least one wide economic moat. These could include Telstra Group Ltd (ASX: TLS), Commonwealth Bank of Australia (ASX: CBA), Woolworths Group Ltd (ASX: WOW), Coles Group Ltd (ASX: COL), Transurban Group (ASX: TCL), and Wesfarmers Ltd (ASX: WES).

Saying that, finding a wide-moat ASX stock is not the end-game. Investors also need to buy shares of these stocks at prices that make sense. And that is certainly easier said than done.

The post Stagflation: How to position an ASX stock portfolio appeared first on The Motley Fool Australia.

More reading

• Here are the latest growth forecasts for the Wesfarmers share price
• Why I don’t own Telstra shares (yet)
• 5 powerhouse ASX dividend shares to buy and hold until 2050
• How to build a second income from ASX shares without taking big risks
• 3 ASX 200 shares tipped to tumble 10% (or more) in the next 12 months

American Express is an advertising partner of Motley Fool Money. Motley Fool contributor Sebastian Bowen has positions in American Express, Apple, Berkshire Hathaway, Coca-Cola, VanEck Morningstar Wide Moat ETF, and Wesfarmers. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, Berkshire Hathaway, Transurban Group, and Wesfarmers and is short shares of Apple. The Motley Fool Australia has positions in and has recommended Telstra Group, Transurban Group, and Woolworths Group. The Motley Fool Australia has recommended Apple, Berkshire Hathaway, VanEck Morningstar Wide Moat ETF, and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.