Real assets in an unreal world

Please note: This article is more technical in nature than our typical articles, and may require some background knowledge and experience in investing to understand the themes that we explore below.  

All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

Key points 

• As President Trump launches a wide-ranging trade war, the risk of a global slowdown and surge in inflation has risen
• Finding out which asset classes are most sensitive to price changes can be key for investors’ asset allocation at such times
• Equities, commodities and real estate are among assets that are positively correlated with stronger inflation. At a country level, resource-rich indices, such as found in Canada and Australia, tend to perform well
• With a significant macro and inflationary regime shift on the cards, having a well-diversified portfolio is more important than usual. Exposure to real assets can help in achieving this.  

After a prolonged period of heightened volatility since the COVID-19 pandemic, US headline inflation appeared to moderate, stabilising below 3% in the latter half of 2024. However, this period of relative calm was soon disrupted.  

In a major shift in trade policy, President Donald Trump announced the implementation of sweeping tariffs, including a baseline 10% levy on all US imports, with even steeper rates targeted at specific trading partners. 

Tariffs and inflation 

Although tariffs are formally collected from importers, the economic burden rarely ends there. Some of the added costs for businesses could be passed on to consumers in the form of higher prices.  

Even when the imported goods are intermediate inputs, rather than final consumer products, the inflationary effects can permeate through supply chains, gradually embedding themselves in the prices of finished goods. As such, this new wave of protectionist policies could spark a fresh inflationary impulse. 

What it might mean for equities and bonds 

Historically, equity markets have offered modest protection against rising prices, largely due to their capacity to reflect increases in corporate revenues and nominal earnings. Bonds, by contrast, tend to fare poorly at such times, as rising prices erode the real value of fixed-interest payments. 

Yet, when inflation becomes excessive – typically defined as rates exceeding 5% – even equities struggle to deliver positive real returns. This pattern was seen as inflation surged in 2021 and 2022, when both equity and bond markets fell, undermining traditional portfolio diversification strategies, as explained in Where next for the equity-bond correlation?

So, as investors plan for a period of higher inflation, which assets are usually most sensitive to price changes? As always, it is important to remember that historical performance is not necessarily indicative of future outcomes.  

The reverberations of inflation 

One way to uncover which assets are most sensitive to changes in inflation is through historical correlations (see chart). 

Correlation between the US inflation and selected asset classes 

The average historical correlation between the changes in the US headline inflation rate and returns for selected asset classes from December 1998 to March 2025, measured on a monthly frequency. 

As expected, equities are positively correlated with inflation, while fixed-rate nominal bonds display a strong negative correlation to it.  

But the inflation story doesn’t end there. Commodities also offer some protection against inflation. Within this group, energy and industrial metals stand out. This is unsurprising given their role in the real economy and input costs. Real estate is also positively correlated with inflation, reflecting both its tangible asset value and income potential. Infrastructure, by contrast, appears to be largely uncorrelated, with its performance shaped more by regulation and contract structures than by price dynamics. 

Turning to the performance of regional equity markets, Canada and Australia show a natural tilt toward inflation protection, given their heavy exposure to resource-oriented sectors. Similarly, within sectors, energy and financials emerge as partial hedges against inflationary pressure. 

By peeling back these layers, a more nuanced map of inflation sensitivity emerges – one that can help investors to think more deliberately about asset allocation in a world where inflation is more of a worry. 

What about growth? 

Rather than treating inflation in isolation, the prevailing economic growth regime also matters in determining its impact on asset returns. 

To address this, we split the economic landscape into distinct regimes based on inflation and growth. The former is defined in terms of changes in the one-year inflation rate, either stable or rising. Growth is measured by changes in one-year US industrial production. 

There are two particularly relevant regimes: 

• Overheating: Rising inflation alongside positive growth; and 
• Stagflation: Rising inflation paired with negative growth. 

The asset performance within these regimes can be seen in the chart. Focusing on the stagflation regime, certain commodities, such as industrial and precious metals, show resilience. While energy has a high overall correlation with inflation, its strength is confined to the overheating regime; in stagflationary conditions, it underperforms.  

Other assets that appear to offer some protection during stagflationary times include Canadian equities, with a bias to resource-heavy stocks, and utilities, which tend to be defensive in nature. 

Asset performance in various macro regimes relative to a 60/40 equity-bond portfolio

The median relative performance of different asset classes relative to 60/40 equity-bond portfolio in four macroeconomic environments: (1) Falling inflation (a decline greater than half a standard deviation), (2) Stable inflation (fluctuations within half a standard deviation), (3) Overheating (rising inflation and positive growth) and (4) Stagflation (rising inflation and negative growth). The analysis is based on monthly data from December 1998 to March 2025.

Portfolio implications 

Well-diversified portfolios remain the most effective way for investors to navigate a wide range of macroeconomic environments. As the US administration launches wide-ranging tariffs, there is an increased risk of an economic slowdown and higher inflation – a combination that can weigh heavily on investments in traditional asset classes.  

In this context, real assets have typically acted as somewhat of a hedge. While they may deliver lower expected returns than equities or bonds over the long term, their role as portfolio diversifiers can aid performance during periods when market dynamics are shaped by shifting inflation and growth regimes.