My subscription
...
Filters
My Subscription All Publications

What a bout of deflation would mean for asset returns

This Focus examines the implications of deflation for asset returns. It is motivated by the recent collapse in market-based measures of US inflation compensation amid the spread of coronavirus, to their lowest levels since the Global Financial Crisis (GFC). That collapse almost certainly exaggerated the change in investors’ expectations for inflation. And, in any case, it has partly reversed in recent days in response to the announcement of further policy stimulus. Nonetheless, investors still seem to be braced for a short-lived fall in the annual rate of change in the US consumer price index (CPI).
John Higgins Chief Markets Economist
Continue reading

More from Asset Allocation

Asset Allocation Update

Yield curve positioning after peak inflation

Although Treasury yields have dropped back in recent weeks amid signs that inflation has peaked, we don’t think it makes sense to extend duration. Of course, the longer a bond’s remaining life, the greater the sensitivity of its price to a change in its yield. So, those with distant maturities would tend to deliver better returns if yields fell further alongside inflation, even if the curve bull steepened a bit. But we suspect there will be a considerable lag between peaks in inflation and yields, as there was in the early 1980s.

24 May 2022

Asset Allocation Update

On the relative prospects for US equity REITs

We expect US equity REITs to remain under pressure between now and the middle of next year, given our view of the US stock and bond markets. Nonetheless, we doubt they will underperform US equities substantially given their relative valuations – we see no clear evidence that they are in more of a bubble; the overall outlook for the property markets in which they invest; and their apparently solid fundamentals.

17 May 2022

Asset Allocation Outlook

Asset allocation after inflation has peaked

Although we suspect that inflation in the US has now peaked, we don’t think that this will prevent either long-dated Treasury yields from rising again or the stock market there from coming under renewed pressure until the middle of next year. Indeed, we expect most “safe” and “risky” assets to fare poorly between now and then. This reflects a view that their fortunes won’t turn around decisively until shortly before the Fed stops tightening policy in summer 2023, even if the central bank engineers a “soft landing” for the economy in the meantime. Markets Drop-In (11th May, 10:00 EDT/15:00 BST): We’re discussing our Q2 Outlook reports and what they say about the potential performance of bonds, equities and FX rates as inflation peaks in a special 20-minute briefing on Wednesday. Register now.

10 May 2022

More from John Higgins

Asset Allocation Update

We expect a brighter future for Japan’s stock market

Although Japan’s stock market has substantially underperformed its counterparts in the US, UK and euro-zone during the past few months, we don’t expect it to remain a laggard.

28 May 2021

Capital Daily

US corporate bonds versus equities

The relative valuation of stock and corporate bond markets continues to make us doubt that equities in general are in a bubble. It remains very different to the situation before collapses in the US stock market in the late 1920s and early 2000s.

19 May 2021

Asset Allocation Update

We doubt the 10Y UST/Bund spread will keep shrinking

Although the spread between 10-year sovereign bond yields in the US and Germany has narrowed so far during the second quarter of this year, we doubt this will continue for much longer.

19 May 2021
↑ Back to top