What Asset Classes Will Deliver Excess Returns During The Inflation Of 2022?

by Corey Philip //  December 29, 2021

The Former Treasury secretary Larry summers is warning of a looming recession over quote surging inflation. (source)

The Personal consumption expenditures price index (PCE index) just hit a 40 year high.  (source)

Inflation is here folks.

But you didn’t need a fucking report to tell you that, cause dollar tree is now taking things up beyond a dollar for the first time in their 35 year history.  And even if that was news to you, you’ve certainly noticed prices everywhere are up.

So what asset classes can we go to for high returns during inflationary periods?

This chart published by Blackrock shows us the average total annual return by asset classes in in different types of inflationairy periods, which is a much better comparison than simply generalizing all periods of inflation.

We can see at the bottom that high growth periods are classified as periods when US GDP growth is greater than 2.5% and and high inflation is when THE US CPI is increasing faster than 2.5%  

As you would expect in a high growth / low inflation period stocks are the asset class to be in with average annual total returns in these conditions being above 20%.  

In a growth and high inflation period as we have been in for 2021 Real estate and global infrastructure have been the asset classes to be in.  This chart was based on data through Dec 2020 so that gives a year of “out of sample data” to check out.

Interestingly enough real estate has done incredibly well this year with the Vanguard REIT ETF returning 35.75% while the sp500 returned 29.19%.  Not a shabby year for either of those two really.  And then there is global infrastructure which has historically returned almost 15% annually during prior years of similar growth and inflation.  Represented by the ishares Global infrastructure ETF has returned only 9.39%.   So Global Infrastructure hasn’t exactly held up in this high growth high inflation period.

Of course we couldn’t avoid looking at the good ole boy inflation hedge of gold.  A lot of people seem to think gold is the best inflation hedge.  I don’t know why.  That really couldn’t be further from the truth.  This chart here from visual capitalist shows us that while gold did crush it during the inflation of the 70s, with a return about 3 and a half times inflation, it had negative returns during the inflationary periods of the 80s.  

So going forward, where does that leave us?  

Well to me it is clear that no two inflationary periods are the the same.  Different things can happen every single time.  Just as we see with recessions.    

Before the March 2020 recession… i know shortlived, no body predicted that a virus would cause a recession, nor that high growth tech stocks would become the safe havens but they did.  

Considering that, the best time to prepare for inflation was a few years ago with a diverse portfolio.  Absent that we can clearly see that cash is not king.  Anything in cash is just loss.  

If you want to try to capitalize on inflation,  increasing exposure to to reits doesn’t seem like a bad idea considering the momentum they’ve had through this go-around and their performance in past inflationary periods.  Just remember investing is risky and predictions do tend to be wrong, so keep your exposure to whatever you consider  to safe amount.  Now if you do decide to increase your exposure to reits, when do you get off the train?

I like to have a quantitative rule for exiting everything I get into it.  

There’s two possibilities I see.  One possibility might be when we have two consecutive quarters of declining inflation – simply inflation is no longer growing.  Another possibility might be when the 6 month total return of reits is less that the 6 month total return of the s&p 500 or t-bills.  

So how are you positioning your portfolio? Are you making any tactical changes?  Let me know in the comments below.

About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

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