Outrageous Predictions
Executive Summary: Outrageous Predictions 2026
Saxo Group
Read Saxo's Outrageous Predictions for 2026, our latest batch of low probability, but high impact ev...
Access both platforms from your single Saxo account.
Investor Insights: Why value stocks could shine with stagflation
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
The initial reaction in financial markets was the inflation phase from higher energy prices but increasingly investors are looking to the growth element.
PMI reports this week showed the steepest rise in input costs for firms since 2022 combined with growth stalling.
Manufacturers reported the biggest month-over-month jump in their input prices since October 1992.
Separate data showed retail sales tumbled this month by the most since the onset of the Covid lockdown in April 2020.
UK consumer sentiment to its lowest level on record, down from -30 to –53, according to trade body British Retail Consortium (BRC).
The OECD has downgraded its 2026 growth forecast to 0.7%, from a previous prediction of 1.2%, the steepest cut among G20 economies, while inflation will accelerate to 4% this year because of higher energy prices.
The end of the QE and ultra-low rates world post GFC ended, bringing an end to the decades-long bond bull market. This period favoured growth over value but the scales have tilted.
Moreover, value has often done well at the early stages of an economic and market cycles when bond yields rise.
A stagflation environment (low growth + high inflation) is one of the few macro backdrops where value tends to outperform growth, and the reasons are fairly intuitive when you break them down.
1) Cash flows today matter more than promises tomorrow
Value stocks (banks, energy, industrials) generate near-term, tangible earnings.
In other words, the market stops paying up for “jam tomorrow” and prefers “cash today.” Candidates include the likes of BP, Shell, NatWest and HSBC, though caution that banks are exposed to cyclical growth worries in Asia and Europe, while oil majors are exposed to higher prices reverting sharply on de-escalation.
2) Higher rates compress growth valuations
Stagflation usually forces central banks to keep rates higher for longer (or at least not cut aggressively). We’ve seen aggressive repricing in front-end yields – although it is highly debatable why central banks would hike rates into a temporary supply shock – this is not 2022.
Nevertheless, higher discount rates disproportionately hurt high-multiple growth stocks. Value stocks already trade on lower multiples, so there’s less to compress. Growth gets de-rated; value has less far to fall. Popular stocks in this bracket would include Vodafone and British American Tobacco.
3) Sector composition favours value, inflation lifts value sectors; it pressures growth sectors.
In stagflation, costs rise but demand is weak. Companies that can pass through price increases outperform. Many value companies (e.g. energy, materials) are price setters or tied to real assets. Real asset exposure beats intangible growth narratives – look to the HALO companies.
5) Dividends and income matter more
With volatility high and real returns uncertain, investors shift toward anything that can a) shield them from volatility and b) smooth returns. This tends to place an emphasis on value stock strengths such as dividend yield, capital discipline etc. If equity markets trade sideways – as they did during the 1970s stagflation - income becomes a bigger part of total return. Here I looked at the highest yielding FTSE stocks that had retained positive momentum in the last 3 months and last year.
Financials such as Aviva, M&G, Legal & General plus property REITs like Land Securities are among the highest dividend payers on the FTSE. It's worth a look at some income-focused trusts such as the Henderson High Income (HHI) or Foresight Environmental Infrastructure (FEGN), which offer progressive dividend and yield around 9% and 11% respectively.
Key Points
- 2026 has rocked investors and the war in the Middle East is forcing a rethink about inflation and growth
- Value stocks can outperform during a period of stagflation
- Here we look at the reasons why value could do well in this environment and some FTSE stocks to think about
Surging energy prices, disrupted supply chains, rising food costs and business and consumer confidence plunging – the effects of the Iran war are being felt acutely already.
The initial reaction in financial markets was the inflation phase from higher energy prices but increasingly investors are looking to the growth element.
Ugly Outlook
The UK in particular seems to be heading for a stagflationary environment with higher inflation and slower growth.
PMI reports this week showed the steepest rise in input costs for firms since 2022 combined with growth stalling.
Manufacturers reported the biggest month-over-month jump in their input prices since October 1992.
Separate data showed retail sales tumbled this month by the most since the onset of the Covid lockdown in April 2020.
UK consumer sentiment to its lowest level on record, down from -30 to –53, according to trade body British Retail Consortium (BRC).
The OECD has downgraded its 2026 growth forecast to 0.7%, from a previous prediction of 1.2%, the steepest cut among G20 economies, while inflation will accelerate to 4% this year because of higher energy prices.
Time to look at value stocks?
Investment professionals have been looking at value more favourably for a while.
The end of the QE and ultra-low rates world post GFC ended, bringing an end to the decades-long bond bull market. This period favoured growth over value but the scales have tilted.
Moreover, value has often done well at the early stages of an economic and market cycles when bond yields rise.
This has created a more level playing field but stagflation – if it comes – favours value.
A stagflation environment (low growth + high inflation) is one of the few macro backdrops where value tends to outperform growth, and the reasons are fairly intuitive when you break them down.
1) Cash flows today matter more than promises tomorrow
Value stocks (banks, energy, industrials) generate near-term, tangible earnings.
Growth stocks rely heavily on long-duration future cash flows. In stagflation, higher inflation and interest rates erode the present value of those distant earnings.
In other words, the market stops paying up for “jam tomorrow” and prefers “cash today.” Candidates include the likes of BP, Shell, NatWest and HSBC, though caution that banks are exposed to cyclical growth worries in Asia and Europe, while oil majors are exposed to higher prices reverting sharply on de-escalation.
2) Higher rates compress growth valuations
Stagflation usually forces central banks to keep rates higher for longer (or at least not cut aggressively). We’ve seen aggressive repricing in front-end yields – although it is highly debatable why central banks would hike rates into a temporary supply shock – this is not 2022.
Nevertheless, higher discount rates disproportionately hurt high-multiple growth stocks. Value stocks already trade on lower multiples, so there’s less to compress. Growth gets de-rated; value has less far to fall. Popular stocks in this bracket would include Vodafone and British American Tobacco.
3) Sector composition favours value, inflation lifts value sectors; it pressures growth sectors.
- Value indices are tilted toward sectors that benefit from inflation:
- Energy & commodities → higher prices = higher revenues
- Financials → benefit (initially) from higher rates / margins
- Industrials → pricing power in supply-constrained environments
Growth indices are heavy in:
- Tech
- Consumer discretionary
- Long-duration assets
If we highlight commodities within this space – think mining stocks, which have been hit hard since the Middle East conflict started as they face the double blow from falling commodity prices and rising production costs. Multiples have compressed as a result but the structural long-term thesis for materials remains in play. Antofagasta, Rio Tinto, Glencore are among the major mining stocks poised to capitalise on structural demand for metals.
In stagflation, costs rise but demand is weak. Companies that can pass through price increases outperform. Many value companies (e.g. energy, materials) are price setters or tied to real assets. Real asset exposure beats intangible growth narratives – look to the HALO companies.
5) Dividends and income matter more
With volatility high and real returns uncertain, investors shift toward anything that can a) shield them from volatility and b) smooth returns. This tends to place an emphasis on value stock strengths such as dividend yield, capital discipline etc. If equity markets trade sideways – as they did during the 1970s stagflation - income becomes a bigger part of total return. Here I looked at the highest yielding FTSE stocks that had retained positive momentum in the last 3 months and last year.
Financials such as Aviva, M&G, Legal & General plus property REITs like Land Securities are among the highest dividend payers on the FTSE. It's worth a look at some income-focused trusts such as the Henderson High Income (HHI) or Foresight Environmental Infrastructure (FEGN), which offer progressive dividend and yield around 9% and 11% respectively.
Key characteristics of value stocks
Value stocks usually present the following characteristics:
- Low price-to-earnings (P/E) ratio. Value stocks often trade at lower P/E ratios, meaning the market price is low relative to the company's earnings.
- Low price-to-book (P/B) ratio. These stocks tend to have a lower market price compared to the company's book value, indicating potential undervaluation.
- Consistent dividends. Many value stocks are mature companies that generate enough cash flow to pay regular and often high dividends.
- Stable business models. Value stocks are usually companies with established, stable business models that have been operating for years or even decades.
- Lower growth expectations. Unlike growth stocks, value stocks generally come from companies with slower but steady growth rates, which is why they may be trading at a discount.
Consider the risks
Some value stocks are often known "value traps" for a reason - investors should do their own research to distinguish the traps them from quality companies with low valuation.
Not all value stocks are created equal - many value stocks are cyclically exposed to downturns due to the sector they are in.
My colleague Ruben looked at some of the sectors in the value investing space to consider.
Latest Market Insights
Outrageous Predictions 2026
-
-
Outrageous Predictions
A Fortune 500 company names an AI model as CEO
Charu Chanana
Chief Investment Strategist
Can AI be trusted to take over in the boardroom? With the right algorithms and balanced human oversi... -
Outrageous Predictions
Dollar dominance challenged by Beijing’s golden yuan
Charu Chanana
Chief Investment Strategist
Beijing does an end-run around the US dollar, setting up a framework for settling trade in a neutral... -
Outrageous Predictions
Obesity drugs for everyone – even for pets
Jacob Falkencrone
Global Head of Investment Strategy
The availability of GLP-1 drugs in pill form makes them ubiquitous, shrinking waistlines, even for p... -
Outrageous Predictions
Dumb AI triggers trillion-dollar clean-up
Jacob Falkencrone
Global Head of Investment Strategy
Agentic AI systems are deployed across all sectors, and after a solid start, mistakes trigger a tril... -
Outrageous Predictions
Quantum leap Q-Day arrives early, crashing crypto and destabilizing world finance
Neil Wilson
Investor Content Strategist
A quantum computer cracks today’s digital security, bringing enough chaos with it that Bitcoin crash... -
Outrageous Predictions
SpaceX announces an IPO, supercharging extraterrestrial markets
John J. Hardy
Global Head of Macro Strategy
Financial markets go into orbit, to the moon and beyond as SpaceX expands rocket launches by orders-... -
Outrageous Predictions
Taylor Swift-Kelce wedding spikes global growth
John J. Hardy
Global Head of Macro Strategy
Next year’s most anticipated wedding inspires Gen Z to drop the doomscrolling and dial up the real w... -
Outrageous Predictions
Britain’s Great EU Backdoor Return
Neil Wilson
Investor Content Strategist
Faced with rolling fiscal, economic, trade and political crises the UK government sneaks back into t... -
Outrageous Predictions
Despite concerns, U.S. 2026 mid-term elections proceed smoothly
John J. Hardy
Global Head of Macro Strategy
In spite of outstanding threats to the American democratic process, the US midterms come and go cord...