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 | |
Cash | 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.