Major Asset Classes Vs. Inflation (since 1971)

• As inflation pressures continue to intensify in the US (but also globally), investors have been trying to find the optimal asset allocation for the medium term.
• In theory, real assets such as gold or housing tend to perform well in periods of accelerating inflation; however, equities also tend to experience a positive momentum if inflationary pressures are going to be moderate and temporary.
• Hence, the chart below shows the average monthly performance of the main asset classes in periods of accelerating inflation since January 1971 (in other words, when the YoY change in the inflation rate is positive):
• We use SP500 for US equities, MSCI World for World equities and the Barclays US Treasury Index for US Bonds;
• The times series for US Bonds start in January 1973.
• As expected, gold is the best performer, averaging 0.64% in monthly returns (vs. USD) since January 1971.
• Interestingly, US Bonds are the second best performer in periods of accelerating inflation, averaging 0.23% in monthly returns.
• Equities have also averaged positive monthly returns, with the US (+0.2%) outperforming World equities (+0.14%).
• The USD index performance is flat (which was expected as major currencies tend to follow a mean-reversion process over the long-run), which implies that the current inflationary environment could levitate some of the asset classes to new highs in the medium term.

Source: Bloomberg/MNI