A 100-year view of inflation and asset returns

Anthony Doyle

Firetrail Investments

Taking a very long view on inflation data, we see that equities and bonds both perform better when inflation is falling. But what about today’s world of persistent price rises?

In general, equities and bonds prefer falling inflation, according to Fidelity International’s analysis of US asset returns over the previous 100 years. The exception is the stellar performance of equities when inflation is low and rising, a result of this inflation regime being highly correlated with the initial phase of an economic rebound.

But what about today’s ‘high’ inflation regime (greater than 3 per cent), which we see in many major economies including the US? History indicates we should expect mediocre real returns from equities and bonds. 

But more important is where inflation goes from here: investors with a 60:40 portfolio enjoyed an average real return of 3.6 per cent when inflation was ‘high and falling’ but lost 4.2 per cent a year on average when inflation was ‘high and rising’, according to our study.

History is obviously not a perfect guide to the future and there is one specific reason to think this time might be different. Real yields are deeply suppressed. Equity returns are generally better when real yields are low, no matter the inflation regime. 

The one exception is when inflation is high and rising, making central bank decisions on whether to prioritise price stability or growth all the more significant.

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This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making an investment decision retail investors should seek advice from their financial adviser.

Head of Investment Strategy - Firetrail S3 Global Opportunities Fund
Firetrail Investments

Anthony Doyle is Head of Investment Strategy for the Firetrail S3 Global Opportunities Fund. His primary responsibilities include fundamental idea generation, portfolio analysis, and economic insights including currency and macroeconomic risk...

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