Insights   •   Rising Rates

How To Beat Inflation: An Australian Case Study

  • As the global economy emerges from the COVID pandemic, investors turn their focus to inflation.
  • Recent inflation surprises have heightened investor concerns, with rising input costs and a strong rebound in global demand.
  • While current spikes should moderate later in 2021, price rises are expected to remain at elevated levels for the next two years.

Given the importance of inflation considerations, we conducted a quantitative analysis on how investors can protect themselves against rising prices. Our analysis scrutinizes the historical performance of different assets classes under different inflationary regimes and studying whether their performance corresponded with expected and unexpected inflation. Finally, we also considered the potential impact on investments from inflation shocks, defined as a one standard deviation move.

Below are the key findings from our analysis.

  Shorter Term Inflation (Monthly) Longer Term Inflation Inflation Shocks

Effective at hedging part of the portfolio

Some hedging capability against expected inflation

Not effective  Effective immediately after shocks
Equities Generally ineffective  Most effective Ineffective
Bonds Generally ineffective (though inflation-linked bonds have some inflation-hedging potential, especially expected inflation) Not effective Ineffective immediately following the shock
Commodities  Generally effective (especially against unexpected inflation) as many commodities make up part of the inflation basket Not effective due to poor cumulative returns Effective initially with sensitivity tailing off gradually.

For illustrative purposes only.