The last two years have been full of extraordinary challenges. Following the outbreak of the pandemic, the lockdowns and restrictions imposed by governments around the globe hit economies and markets hard and fast. What followed was unprecedented fiscal and monetary support to stop an economic meltdown not seen since the Great Depression. Pharmaceutical companies worked tirelessly to provide a solution, and once found, regulators swiftly approved and health services quickly distributed vaccinations, initially in developed countries but increasingly in emerging countries as well. 


However, the short, sharp recession followed by the recovery has brought about another potential challenge — the re-emergence of an old foe, inflation.


The question is whether this post-reopening bout of inflation will persist and, if so, how it will affect portfolios. There has been no shortage of opinions on the future trajectory of inflation. The Federal Reserve and other major central banks believe the current rise is transitory and inflation will fall back down to normal levels. However, inflation is notoriously hard to predict. It is driven as much, if not more, by collective psychology as any conventional mathematical formula. While inflation expectations remaining anchored is still our base case, it is far from certain and definitely less certain than before the pandemic.


Portfolio construction needs to reflect this increased risk. Traditional portfolios, dominated by equities and bonds, have performed exceptionally well through the disinflationary environment over the last decade. But in an environment of persistently higher and more volatile inflation, they would likely experience a negative impact. 


We discuss the implications for portfolios under a range of possible scenarios for economies and markets as well as the scenarios’ impact on a broad range of asset classes. Inflation is clearly not a homogenous phenomenon but appears in different shapes depending on the economic environment. As such, it cannot be addressed with a silver-bullet, single-inflation-protecting strategy. We find the solution, for our portfolios at least, is a diversified blend of strategies that seek to provide broad inflation protection in a number of different scenarios. The lessons learned can be tailored to investors’ respective portfolios and investment objectives, as we demonstrate in our final section.


Information contained herein may have been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential, or incidental damages) for any error, omission or inaccuracy in the data supplied by any third party.

Past performance is no guarantee of future results. The value of investments can go down as well as up, and you may not get back the amount you have invested. Investments denominated in a foreign currency will fluctuate with the value of the currency. Certain investments, such as securities issued by small capitalization, foreign and emerging market issuers, real property, and illiquid, leveraged or high-yield funds, carry additional risks that should be considered before choosing an investment manager or making an investment decision.

This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.

Learn more about the solutions Mercer provides...