Inflation is coming. Inflation is here. Investors, if they have not already, need to review and implement portfolio strategies for a different inflation regime. It is possible that the recent prints of high inflation will be transitory, but policy-makers desire to have a higher inflation environment, so investors should only disregard inflation at their own peril.
Investors have to look at the impact of inflation on both the asset classes and strategy styles. From this analysis, it is clear that trend-following across many asset classes will do well for investors. The process of trend-following going long or short in any asset class can protect from the downside impact from inflation and allow for upside capture. See The Best Strategies for Inflationary Time.
Making good inflation choices is critical for investors given the large dispersion in returns across asset classes and styles. The return dispersion within equity asset class styles is tighter than what is seen across asset classes, but the data suggest holding momentum during inflation shocks. Within the trend style, holding bond and commodity exposure will do better than currencies or equities. There is less inflation ambiguity - short bonds and long commodity during unexpected increases in inflation is an effective strategy combination. Adjusting for inflation is more than just changing asset classes, it also is an adjustment of strategy thinking with a focus on trend-following.
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