Inflation will have an impact on equity returns. While it is often stated that equities, unlike bonds, will gain with inflation, the reality is more complex. OSAM, the equity management firm, reviewed a long history of close to one hundred years and found that equity nominal returns will always be positive regardless of the inflation environment; however, nominal and real returns will decline in higher inflation periods.
During high inflation periods, the price earnings ratio declines. The valuation compression harms total return. It is also found that momentum and value factors show higher excess returns in the higher inflation quantile. There is a way to tilt portfolios to offset some of the negative inflation effects; however, a judgment must be made on whether current inflation will be rising or abating, still the key question.
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