Originally published: 14/02/2022 16:13
Publication number: ELQ-73641-1
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2022 and Inflation Video

2022 Is A Year of Investing Focused on the Outlook for Inflation

nflation will determine much of the investing methodologies and stock selection decisions in 2022. The outlook for inflation and the expectation of how it will playout throughout 2022 impact asset allocation decisions. Inflation can be measured in a variety of ways including the net change in CPI, PPI and the GDP deflator. All measures point to heightened inflation throughout 2021 and into 2022. The expectation for inflation will drive many investment decisions this year. This expectation can be determined in a variety of ways including through surveys or the spread between the treasury bond rates and inflation protected treasury bond rates of equivalent maturity. Hence, expected inflation is predictable and it can be integrated into stock selection, investing and asset allocation decisions with investors requiring higher rates on bonds or higher expected returns for stocks. The unexpected inflation, however, which is the difference between the actual inflation and the expected inflation, will impact investors and businesses with or without pricing powers and asset classes such as equities, bonds, currencies and real assets differently. In the following calculations the expected inflation is determined by taking the average inflation rate over the last 10 years. The unexpected inflation data along with all asset data (equities, bonds, gold, treasuries) are then broken down into five quintiles with the lowest quintile representing a scenario when actual inflation is below the expected inflation at most and highest quintile representing the scenario when actual inflation is above the expected inflation at most. The relationship between Unexpected Inflation and Gold, Real Estate, and Financial Asset (Bonds and Stocks) Returns as well as Size, Growth and Value Factors is analyzed in this briefing.

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