Asset Class and Factor Premium Performances Across Inflation Regimes

How should investors reposition portfolios across inflationary regimes (deflation, low inflation, mild inflation, high inflation)? In their July 2022, paper entitled "Investing in Deflation, Inflation, and Stagflation Regimes", Guido Baltussen, Laurens Swinkels and Pim van Vliet examine asset class and factor returns across inflationary regimes. They first construct long monthly return histories for asset classes (global equities, bonds and cash) and four factors (value, momentum, low-risk and quality/carry) as applied to equities, bonds and a multi-asset portfolio. They then segment the long sample into four global inflation regimes: (1) below 0% (deflation); (2) 0% to 2% (low); (3) 2% to 4% (mild); and, (4) above 4% (high). They next define sub-regimes (most notably for high inflation) according to other economic variables, with focus on stagflation (high inflation and economic downturn as measured by recessions, weakening earnings or falling equity markets). They further divide sub-regimes based on increasing/decreasing long-term interest rates or inflation rates. Using monthly inflation and asset price data as specified during 1875 through 2021 (147 years), they find that: