There is a particular kind of word that arrives in financial media slowly, then all at once. For most of the last twenty years, “stagflation” was the kind of term reserved for economic historians, the occasional fund manager letter, and Howard Marks footnotes. This week, it became the word.

The Deputy Governor of the Reserve Bank used it on the conference circuit. Deloitte used it in its quarterly Business Outlook. KPMG used it. The Australian Chamber of Commerce and Industry used it. Even the more cautious mainstream economists who normally treat the word like it might combust on contact are now saying it openly.

The trigger was Wednesday’s GDP data. The Australian economy grew just 0.3 per cent in the March quarter, well below the 0.5 per cent expected. Annual growth held at 2.5 per cent but the loss of momentum is unmistakable. GDP per capita fell. Productivity went backwards. Household consumption was weak. The mining sector dragged. Exports fell at their fastest pace in two years. And the current account deficit hit a record peak.

Add that to inflation at 4.6 per cent, a cash rate back at its previous cycle peak of 4.35 per cent, and an unresolved oil shock that has fuel prices doing strange things to the consumer basket, and you have the textbook ingredients. Growth too weak. Inflation too high. A central bank with no good options.

The temptation, when stagflation enters the mainstream conversation, is to do one of two things. Sell everything and hide in cash. Or buy whatever the 1970s playbook says worked last time. Both reactions, in our experience, tend to be costly.

This article is about the third option. Think clearly. Stay invested. Adjust thoughtfully. And remember that the investors who navigate hard regimes well are almost never the ones who panic at the headline.

What stagflation actually does to a portfolio

Stagflation is uncomfortable because it breaks the usual trade off that drives a lot of portfolio construction.

In a normal slowdown, growth weakens, inflation falls, central banks cut rates, bonds rally, and the classic 60/40 portfolio works because bonds offset equity weakness. In a normal expansion, growth strengthens, inflation rises a little, central banks tighten gently, and equities outperform bonds. Either way, there is a place to hide.

Stagflation removes that comfort. Bonds struggle because inflation eats their real returns. Equities struggle because earnings come under pressure from weaker demand and higher input costs. The 60/40 portfolio, which is the implicit benchmark for a lot of how diversified investors think, loses on both legs simultaneously. The 1970s data shows this clearly. Between 1973 and 1982, both US equities and ten year treasuries delivered negative real returns. The 60/40 portfolio went backwards in purchasing power. Gold and real assets, by contrast, did much better.

That is the headline. But the headline is also where most of the confusion starts.

The 1970s did not produce a single playbook

The instinct, when the word stagflation appears, is to reach for the 1970s playbook. Buy gold. Buy commodities. Buy energy. Avoid bonds. Avoid growth stocks.

There is some truth in this. The S&P GSCI commodity index returned 586 per cent over the 1970s. Gold went from around $269 an ounce in 1970 to over $2,500 by 1980. Energy was the single best performing sector across the decade. Real assets, broadly, preserved purchasing power when financial assets did not.

But the 1970s playbook is easier to read in retrospect than it was to live through. Gold had a brutal early 1970s before it ran. It then spent most of the 1980s and 1990s going nowhere. Energy stocks gave back enormous gains as the cycle turned. The commodities index that returned 586 per cent over the decade returned essentially nothing over the next two. Investors who held those positions for too long gave back almost everything they made.

There is a deeper lesson in this. Stagflation regimes end. They end when central banks finally break the inflation, when supply shocks resolve, when productivity recovers, or when the political will finally arrives to take the pain. The portfolios that perform best across the full cycle are not the ones that bet everything on the stagflation persisting. They are the ones that tilt thoughtfully toward inflation protection while keeping enough exposure to quality businesses and bonds that the eventual transition out of stagflation does not cost them everything.

How to think about it in the Australian context

Australia in 2026 has some real differences from the United States in the 1970s, and they matter for how investors should think about portfolios.

We are a commodity producer, not a commodity importer. Higher oil and energy prices hurt households at the petrol pump but they support the federal budget, the dollar, and the earnings of the resources sector. The Middle East shock that has triggered most of this inflation impulse is a tax on Australian consumers but a benefit to BHP, Woodside, Santos, and a long list of smaller energy and metals names. That is a very different position from a 1970s United States that imported the bulk of its oil from OPEC.

We also have a banking system that is more concentrated, more conservatively capitalised, and more directly exposed to housing than almost any major economy. Higher rates hurt households and bank credit growth, but the dividend yields available on the major banks at current prices are now genuinely meaningful for income investors. The Commonwealth Bank, even after the budget night drama and the 10 per cent fall, is offering a fully franked dividend yield approaching 4.5 per cent. That is not nothing in a real return context.

And we have an equity market that is structurally tilted toward exactly the kinds of businesses that tend to hold up better in difficult macro regimes. Defensive consumer staples like Woolworths and Coles. Inflation linked infrastructure like Transurban and APA. Regulated utilities. Telecommunications with pricing power, like Telstra. Quality healthcare. Resources with global pricing exposure. The ASX 200 is not a tech heavy growth index. It is a yield heavy, real asset heavy, defensive earnings heavy index. That is a structural feature most of the time, not a bug, and it becomes more valuable when the macro turns harder.

None of this means Australia gets a free pass from stagflation. The GDP data this week was genuinely weak. Productivity is genuinely a problem. The household sector is genuinely under pressure. But the starting point matters. We are not in a 1970s United States. We are in a 2026 Australia, and the portfolio implications are different.

What sensible long term investors should actually do

The most useful framework, in our view, is not “rotate to the stagflation portfolio”. It is “stress test what you own against a harder macro regime and make small, sensible adjustments where the test exposes weaknesses”.

A few practical observations.

First, quality matters more than usual. In a benign macro regime, mediocre businesses can ride the tide. In a stagflation regime, businesses with weak pricing power, fragile balance sheets, low returns on capital, or thin margins get exposed quickly. The work of identifying quality, business by business, becomes more valuable, not less. This is the part Howard Marks has been making for forty years and it remains true.

Second, real assets earn a place in the portfolio, but probably not as a hero allocation. Gold has had a strong run already. Energy has had its war premium pulled forward. Commodities are not cheap. A modest allocation to inflation protection makes sense. A heroic bet that the 1970s are about to repeat does not. Use real assets as diversifiers, not as the core of the portfolio.

Third, defensive income is genuinely undervalued in this environment. The ASX is full of businesses with mid single digit yields, fully franked, with reasonable pricing power and durable demand. Coles, Woolworths, Telstra, Transurban, APA, the major banks at current prices. None of them are exciting. All of them tend to hold up better than the market when the macro gets harder. The combination of franking credits, defensive earnings, and yields that compound through the cycle is exactly the kind of boring strategy that quietly wins over five and ten year horizons.

Fourth, do not abandon growth entirely. The temptation in a stagflation conversation is to throw growth stocks overboard and bunker into yield. The historical record is more nuanced. Some growth businesses, particularly those with genuine pricing power and asset light models, continued to compound earnings through the 1970s. The ones that got destroyed were the lower quality growth stocks with weak unit economics and capital hungry models. A quality growth allocation, sized appropriately, remains part of a sensible portfolio.

Fifth, be patient with the rate cycle. The market has gone from pricing further hikes to pricing the RBA on hold within the space of a week. That swing tells you how little anyone really knows. The honest answer is that the cycle will turn when it turns, and trying to front run that turn with concentrated bets on duration, or cyclicals, or property, is a strategy that has burned a lot of people. Better to own a portfolio that does not depend on the exact timing of the turn.

What could go wrong

Three risks are worth flagging honestly.

The oil price could break decisively higher if the Middle East situation escalates further. WTI has already pushed back above $95 this week. If the Strait of Hormuz remains contested or worsens, $100 to $110 is plausible, and the inflation impulse becomes harder to absorb. That would push the RBA back toward another hike, deepen the consumer pressure, and test the defensive earnings thesis.

Conversely, a sudden Middle East resolution would do the opposite. Oil could fall sharply, inflation would moderate faster than the market expects, and the energy and resources trade would unwind quickly. Investors who have leaned hard into commodity exposure on the stagflation thesis would give back most of the trade.

And the global cycle could resolve very differently from what the local data suggests. The United States is still running its own inflation and policy debate. China is still wrestling with its own demand picture. Australia is a small, open, commodity exporting economy that does not get to set its own macro weather. Domestic positioning needs to be calibrated to a global backdrop that can shift faster than anyone expects.

TAMIM Takeaway

The word stagflation is doing a lot of work this week. It is technically correct as a description of the data. Growth is weak. Inflation is high. The central bank has limited room. The conditions meet the textbook definition.

But the word also does something unhelpful. It compresses a complex, evolving, uncertain situation into a single label that triggers a particular kind of fear and a particular kind of trade. The investors who do best in these moments are almost never the ones who match the label with the matching trade. They are the ones who keep thinking clearly, ask what actually changed in the businesses they own, and make small adjustments at the edges of the portfolio rather than dramatic ones at the centre.

The lesson is not to panic. The lesson is not to chase the 1970s playbook either. The lesson is to own quality businesses with pricing power, balance the portfolio toward real assets and defensive income, keep some exposure to growth done sensibly, and accept that the macro regime will turn at some point in a direction that almost nobody currently predicts.

That is not a heroic strategy. It is not designed to look brilliant in any single year. But it has the great virtue of remaining standing when the headlines change, which they always do. Stagflation, if that is what we are in, will not last forever. The portfolio that survives it well will be the one that was built for resilience long before the word entered the news cycle.

If the past week has prompted you to think about your portfolio, that is a good thing. If it has prompted you to overhaul it overnight, that is usually not. The right response is somewhere in the middle, calmer than the headlines, and grounded in the same long term principles that work when the word stagflation is not in the news.