Despite a widening, robust global economic recovery from the pandemic collapse of 2021, there is a long list of worries for investors. Lately, most of the investor questions concern inflation. Inflation has serious implications for bond holders and equity holders alike.

That said, these are unusual times. Technology shares that usually benefit from higher growth rates are under pressure “from inflation”. Bonds are yielding negative rates of return and may never yield enough to cover even a modest level of ambient inflation. There is a lot to understand about the type and degree of inflation expected.

Citi analysts believe that inflation may rise faster in the decade ahead than in the decade past. For investors to earn returns that outpace inflation could require a different portfolio than in the past. If inflation from 2011 and 2020 averaged 2.0% per annum, as measured by the Consumer Price Index (CPI), Citi analysts could imagine inflation from 2021 to 2030 to average 2.5% p.a.

This “small” difference is meaningful as it changes the discount rate for the valuation of securities.

Investment Strategy

Citi analysts advocate portfolio construction that reflects the impact of inflation, but also for healthy, real growth. This approach suggests a reasonable tilt toward equities with dividends that are likely to grow within a more traditional equity/fixed income allocation.

It also suggests a mix of industries and regions where above-trend growth in revenues and profitability is more likely. This speaks to industries undergoing disruptive change and innovation. Only when interest rates rise to positive inflation-adjusted levels, and inflation stabilizes, would such a portfolio return to a normal equity to fixed income mix.