Research Briefing | Apr 25, 2022

Portfolio diversification requires a procyclical inflation regime

Macro Strategy Themes

We think the positive correlation between bond and equity returns will last as long as positive inflation shocks are cost-push (vs demand pull), as a negative stock-bond correlation needs a weakly procyclical inflation regime.

What you will learn:

  • As inflation begins to moderate, rates will peak, and we expect the term premium to decrease again, in line with long-term secular drivers. Bonds will deliver strong returns, coinciding with a more challenging environment for equities due to moderating growth.
  • Thus, even before the next monetary policy easing cycle begins, we expect the stock-bond correlation to gradually return to negative territory, delivering portfolio diversification benefits once again.
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