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For decades, inflation has been a distant concern for institutional investors, hiding in the fringes of low probability risk. But events arising from a global pandemic, unprecedented stimulatory fiscal and monetary policies events, and supply-side bottlenecks have catapulted inflation out of the shadows.
Our story begins with our Goldilocks baseline case and then compares it against three different inflationary scenarios – Stagnation, Benign Inflation Overshoot and Stagflation. By mapping out alternative pathways, we aim to empower influential investment decision-makers in planning for a range of inflationary scenarios, while also providing guidance if one scenario starts to look more probable.
When read from the portfolio perspective, this paper also carries an important moral – that real assets can set an investment portfolio up for outperformance under a range of higher inflation outcomes. Further, active management in listed assets, particularly fixed income, can help mitigate inflation risk.
It also explores the impacts to the main characters of the story: the various assets classes which are fixed income, infrastructure, real estate, private debt, private equity and natural capital.