'How to hedge against stagflation'

 Barclays says stock investors are traversing through shifting macroeconomic narratives and offered ideas on hedging against stagflation risks, as the “unlikely combo” of waning demand and sticky inflation is the worst setup for equities.  

In the U.S. market, Barclays suggests buying protective puts for the materials sector and single-stock puts within the materials, staples and industrials sectors, led by Kimberly-Clark (KMB), aluminum can manufacturer Ball Corp. (BALL), and Proctor & Gamble (PG). 

The macro narratives sway between a good “Goldilocks” economy, overheated conditions, and “ugly” stagflationary winds. While the latter scenario seems the least likely, it is the most harmful for stocks, Stefano Pascale, equity derivatives strategist, said in a research note this week. 

“In a stagflationary environment, the primary headwind would come from margin pressure driven by negative operating leverage,” Pascale said. 

Barclays recommends going long Materials Select Sector SPDR Fund (NYSEARCA:XLB) puts partly funded by SPDR S&P 500 ETF Trust (SPY) puts. 

“Materials (XLB) is particularly exposed to waning pricing power with sales running ~20% above pre-pandemic trends,” Pascale said. “Given XLB vol is historically depressed vs SPY, we favor selling SPY Jun24 500 puts (ref. 516.57, 22-delta) and buying XLB Jun24 90 puts (ref. 90.07, 45-delta) for 1.5%.” 

At the single-stock level, (KMB), (BALL), and (PG) topped Barclays' long-put screen of “high-flying names with cheap vol” that stand to lose the most in a stagflationary environment. 

ETFs centered on the materials sector: 

• Vanguard Materials Index Fund ETF Shares (VAW)
• Vanguard Materials Index Fund ETF Shares (RSPM)
• iShares U.S. Basic Materials ETF (IYM)
• Fidelity MSCI Materials Index ETF(FMAT)
• First Trust Materials AlphaDEX Fund ETF (FXZ)

https://www.msn.com/en-us/money/markets/here-s-how-to-hedge-against-stagflation-risk-according-to-barclays/ar-BB1mg2ib