Inflation Hedging through Asset and Sector Rotation

Alexander Attié and Shaun Roache

Long-term investors face a common problem: how to maintain the purchasing power of their assets over time and achieve a level of real returns consistent with their investment objectives. Both dimensions of this problem are often considered together, but there remains an active debate regarding the first, namely which types of assets provide the most effective hedge against inflation.

The focus on inflation-hedging properties of different asset classes sharpens and fades along with the fluctuations in inflation itself, but what matters the most are unanticipated increases in the rate of inflation. Inflation cycles often begin with an unexpected rise – a “shock” – that then persists. The most intense burst of interest and research in this area followed the persistent rise in inflation through the 1970s in several developed economies. Following the 2007–9 global financial crisis, and large inflows of liquidity by major central banks to support economic activity and shore-up the financial sector, some investors fear, at the time of writing, that inflation may at some point again rise beyond expectations. This implies that inflation hedging remains an important component of long-run