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Investing.com -- With stagflation risks rising, UBS analysts examined how markets have historically performed in environments where growth shifts lower and inflation rises.
In a note Friday, the bank focuses on how different assets respond when both growth and inflation move in various directions.
UBS found that during periods of sluggish growth and rising inflation, the S&P 500 has historically outperformed its regional counterparts.
“The S&P 500 has historically outperformed its regional counterparts when growth was sluggish,” the analysts stated.
Additionally, certain sectors tend to perform better during stagflationary periods, with Energy, Health Care, Food Staples, and Software (ETR:SOWGn) emerging as consistent outperformers in both the US and EU.
On the flip side, sectors such as REITs, Media, Insurance, Financial Services, Communication Services, and Auto Components are said to have historically underperformed during stagflation, according to UBS.
In fixed income markets, UBS observed that credit spreads tend to widen significantly in stagflationary environments, especially when the government yield curve experiences a bull steepening.
"Credit spreads have widened significantly, when the government yield curve has bull steepened," the bank wrote.
Regarding foreign exchange, the US dollar (USD) has typically outperformed in these scenarios, with the Chinese Yuan (CNY) following closely behind.
However, UBS pointed out that “this is unlikely to happen this time around,” given current economic conditions.
Finally, UBS highlighted that commodities such as Gold have historically performed better than Copper in low-growth, high-inflation environments, making it a potentially profitable trade.
“Gold vs. Copper has empirically been a very profitable trade in low growth/high inflation environments,” the firm concluded.