The Impact of High Inflation on Equities
Inflation in the U.S. and in many other countries has accelerated for more than a year, as the U.S. consumer price index reached 8% earlier this year and has remained around that level. Where we go from here is subject to debate. We previously highlighted the delayed impact of the increase in housing prices that may create a tailwind for inflation, but it may be offset by central-bank action and the cooling down of other sectors. But it is unlikely that we see the low levels of previous decades in the short term.
In order to provide context for investors to help navigate this period of high inflation, let's review the performance of the MSCI USA factor and sector indexes over the past year and the sensitivity of each index to inflation. The inflation sensitivities have been calculated by aggregating stock-level inflation sensitivities relative to the MSCI USA Index.1
As shown below, the energy sector was the outlier with highest sensitivity to inflation and highest return over this period. This was not surprising, given that energy has also been the biggest contributor to the growth of inflation. Other sector and factor indexes that showed positive inflation sensitivity and positive return (top-right quartile) were health care, value, high dividend yield and low volatility. On the other side of the spectrum, growth, information technology and consumer discretionary produced negative relative inflation sensitivity and returns.
Sector and factor inflation sensitivity and returns
Relative return and inflation sensitivities of MSCI USA factor and sector indexes. Aug. 2021 to Aug. 2022.
Inflation Sensitivity and Equity Returns
The steep rise in inflation after decades of low inflation raises many questions for investors.
Navigating Inflation in Equity Portfolios
We demonstrate how investors can use stock-level inflation sensitivities to construct portfolios to express their views on inflation.
Has Inflation Affected the Bond-Equity Relationship?
The sharp rise in inflation over the past year and a half, combined with growing concern over the U.S. economy’s strength, may prompt investors to rethink basic assumptions underlying portfolios comprised of bonds, equities and other asset classes.
1 “Measuring Stock Inflation Sensitivity.” MKT MediaStats, Aug. 1. 2021.
The content of this page is for informational purposes only and is intended for institutional professionals with the analytical resources and tools necessary to interpret any performance information. Nothing herein is intended to recommend any product, tool or service. For all references to laws, rules or regulations, please note that the information is provided “as is” and does not constitute legal advice or any binding interpretation. Any approach to comply with regulatory or policy initiatives should be discussed with your own legal counsel and/or the relevant competent authority, as needed.