Wednesday, June 16, 2021

Inflation, equity performance, and portfolio structure


 
How should we look at inflation-focused portfolios? A recent webinar, "Macro-Tilted Equity Indices Protecting your equity portfolio against inflation", from the researchers at Scientific Beta does a good job of looking at this question. 

First, looking at break-even inflation levels does not tell us much about how to tilt an equity portfolio; however, focusing on a robust measure of inflation surprises will provide very useful information. Surprises matter. The level is backward-looking.

Second, inflation surprises generate a strong impact on the sector choices. A focus on financials and small caps will do better than just holding the market portfolio. Additionally, holding stocks that have an inflation focus tilt can do better than the overall market.

Third, diversification in other sectors can help with protecting against inflation; however, commodity and REITs do not have an advantage even in a positive inflation surprise environment versus the market portfolio or an inflation-tilted equity portfolio. Some of there results are conditional on how the report measures and tracks inflation surprises, but it is useful to know that holding commodities or REITs are not a "no-brainer" inflation protection trade. Care should be taken with inflation-tilted portfolios. 





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