* Global infrastructure shown from 9/30/08 to 8/31/18 due to index inception date. Sources: Bloomberg and DWS for period 12/31/02-8/31/18. Past performance does not guarantee future results. Asset class representation: global infrastructure, Dow Jones Brookfield Global Infrastructure Index; global real estate, FTSE EPRA/NAREIT Developed Index; U.S. real estate, EPRA NAREIT United States Index; commodity futures, Bloomberg Commodity Index; commodity equities, S&P Global Natural Resources Index; CPI, U.S. CPI Urban Consumers NSA; global equities, MSCI World Index; global bonds, Bloomberg Barclays Global Aggregate Index. Equity index returns include reinvestment of all distributions. Index returns do not reflect fees or expenses, and it is not possible to invest directly in an index.
As evident in the chart above, it appears inflation has historically shown greater sensitivity to real asset classes (particularly commodities and natural resource equities). Various asset classes tend to respond differently to changes in inflation, however, when it comes to certain real asset classes, we believe that inflation actually has historically been more influenced by– and exhibited different levels of sensitivity to– the underlying performance of real asset classes. This analysis suggests having exposure to real asset classes has historically proven more beneficial prior to an upcoming inflation reading. The key takeaway is asset class returns are more closely tied to inflation on a “leading” basis rather than on a “coincident” basis. Or in other words, how each asset class has historically performed over the long-term compared to inflation on a 1-month look forward (i.e. compares the actual performance of an asset class versus the most recent inflation reading 1-month forward).
The point of looking at inflation and asset class returns in this context is two-fold: 1) real asset classes tend to drive underlying inflation, and 2) in order to reap the full potential benefits of preserving “real” returns, you may want exposure to these asset classes in advance of inflation announcements, should historical trends continue. This analysis suggests having exposure to real asset classes with greater inflation sensitivity prior to an upcoming inflation reading has proven more beneficial, at least in a historical context. The key takeaway is asset class returns are more closely tied to inflation on a “leading” basis rather than on a “coincident” basis.
Another important takeaway is that although equities may provide some hedging benefits when inflation accelerates, there are far better options available for investors, at least if historical trends hold up in the future.
Investors worried about inflation can’t simply ride out a wave of price increases in stocks, at least when there are various alternative options out there which can potentially provide even better protection against the threat of rising prices.
Bottom Line
Inflation has been on the back burner for most investors, but that might be beginning to change. If it does, investors may want to consider increasing allocations to asset classes which can help provide some inflation hedging benefits better than traditional global equities and bonds have in the past. While there are stand-alone securities or asset classes that help provide some inflation hedging benefits, a dynamic approach that uses various real asset classes may be an efficient and effective way to hedge against inflation, while also providing a diversified equity market beta. Such a strategy may prove to be beneficial to investors if inflation rises, and could also help with diversification as an additional benefit too.
For more information on real assets and how commodities, real estate and infrastructure fare in inflationary environments, make sure to visit our real assets center for additional details.