The result depends on growth. The first thing to be clear is that inflation has a negative impact on financial assets. While experienced investors can achieve adequate returns in high inflation environments, it is generally virtually difficult to achieve good real returns.
That said, from a relative perspective, certain asset groups certainly tend to perform better than others. What kind of asset group is it? Importantly, the answer to this depends on the growth environment of the period: whether economic growth is high, medium, or low.
Monthly returns by assets class in different inflation environments
The first thing that stands out in the era of low growth/high inflation, or stagflation, is that most asset groups have performed poorly. Since the mid-1980s, stock performance has been generally sluggish, and so has the performance of gold, global raw materials, and US REITs. Only certain types of bond products such as U.S. government bonds, investment-grade corporate bonds, and mortgage-backed securities (MBS) recorded meaningful returns2.
In fact, the combination of low growth and high inflation is comparable to a “perfect storm” and there is no way out, so this environment is bound to affect investors.
It can be noted that more mixed results were found in the medium-level growth/high inflation phase. U.S. stocks performed somewhat well, while emerging market stocks led the way with a monthly average return of 1.7%. Gold, raw materials, TIPS, and Hard Current EMD also performed well. On the other hand, returns on assets that have performed relatively well in the face of low growth/high inflation have been recorded to be somewhat low.
It may not be surprising, but according to the table above, the performance of the asset group in the high growth/high inflation phase is essentially a reversal of the performance in the low growth/high inflation phase. U.S. stocks, advanced-country stocks, emerging-market stocks, global raw materials, and REITs all posted average returns of more than 1.0%, but performance gains in U.S. government bonds, mortgage securities and investment-grade bonds fell. On the other hand, bond products that have been sluggish in low-growth environments such as emerging market bonds and U.S. high-yield bonds have significantly improved their performance.
If the results in this environment seem familiar, perhaps the reason is that they are not much different from the typical performance we expect from stock and bond investments in the long run. If you look at one market cycle, it’s because stocks tend to record higher returns than bonds.
