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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.

24 September 2021

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.}

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This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. Investing involves risk including the risk of loss of principal.

The views expressed in this material are the views of ETF Model Portfolio Team through the period ended 30 July 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Investing involves risk including the risk of loss of principal.

Diversification does not ensure a profit or guarantee against loss.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Investing in commodities entail significant risk and is not appropriate for all investors. Commodities investing entail significant risk as commodity prices can be extremely volatile due to wide range of factors. A few such factors include overall market movements, real or perceived inflationary trends, commodity index volatility, international, economic and political changes, change in interest and currency exchange rates.

Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.

Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

Investing in REITs involves certain distinct risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of credit extended. REITs are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs, especially mortgage REITs, are also subject to interest rate risk (i.e., as interest rates rise, the value of the REIT may decline).

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA ASL’s express written consent.

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