Investors traditionally rely on the equity-bond relationship to manage portfolio volatility. However, this standard allocation breaks down during inflationary shocks.
To build resilience across the cycle, portfolios can strategically pair broad equities with infrastructure equities to create a comprehensive inflation defence. This is because broad equities capture upside during growth-driven reflation, while infrastructure assets - underpinned by inelastic demand and contractual inflation pass-throughs - protect capital during stagflationary periods when both fixed income and broader equities lag.
What are the four inflation environments?
Economists typically describe four broad inflation environments:
The table below explains the behaviour of equities, bonds and infrastructure in each of these scenarios. It does so by looking at two dimensions: real cashflow protection and capital values. It also details which sub-sectors will perform well in these different environments.
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