Asset class returns during inflation and growth periods


Asset class returns during inflation and growth periods

02 Feb, 2022

With US inflation at 7.0% and US real GDP at 5.5% yoy (Dec 20 – Dec 21) we have entered an economic scenario not seen in decades. We recognise that both numbers are somewhat distorted by the pandemic but nevertheless only a few investors would have predicted this outcome in December 2020.
Insto table Aug 22

This month we look at how various asset classes have performed in the rising and falling growth and inflation regimes. We have defined a rising (falling) inflation regime as the times when inflation is above (below) its 10y average. The same methodology to real GDP growth to determine the growth regimes.

Growth and inflation regimes

Figure 1: Growth and inflation regimes 

For each regime we have calculated the median monthly returns of equities, property, fixed income, cash, gold, commodities & crude oil going back to 1971. Table 1 shows the asset classes ranked by their median return in each regime. As can be seen, more traditional asset classes – namely equities, fixed income and property – perform well in falling inflation regimes. It’s worth noting that the period from March 2020 to Feb 2021 was classified as falling inflation, falling growth period, but equities and property produced above-average returns during this time which lifted the median return in this regime.

However, Property and equities delivered a subdued performance in inflationary growth and stagflation environments. Over recent months many Australian investors have been looking to inflation-proof their portfolios considering allocations to inflation-linked bonds, commodities, oil. Table 1 shows that commodities and oil have historically been the best assets to own in the current Inflationary Growth regime.

It’s also worth remembering that inflation-linked bonds owners are compensated for inflation by earning real yields. However, rising growth regimes generally go hand-in-hand with rising real yields and therefore underperformance of inflation-linked bonds. The returns are protected against rising inflation but not rising growth.  If real yields keep rising over the coming months there may be an inflection point where inflation-linked bonds become attractive to own to hedge against inflation, but until then including a dynamic allocation to the commodity complex can benefit the overall portfolio during this inflationary growth environment.

Asset class performance ranking per regime

Table 1: Asset class performance ranking per regime 

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