Part 2: What To Do in The Case Of Sustained Inflation

GMO

James Montier, Philip Pilkington

Research

11 Pages

GMO builds on its inflation framework by examining how asset returns may shift in a more inflationary regime, arguing that traditional portfolios may struggle if inflation settles above prior norms. The authors suggest equity valuations and bond returns could both face pressure if inflation averages closer to 4%.

Key Takeaways

Equity Valuation Compression: If inflation averages 4%, GMO estimates fair P/E multiples could fall from around 20x to closer to 15x, implying lower forward equity returns.
Bond Return Headwinds: With starting yields near 2%, even a 1–2% rise in inflation expectations could materially erode real returns across fixed income portfolios.
Real Asset Resilience: Assets like commodities and resource equities historically outperform during inflation spikes, with some periods showing excess returns above 10% relative to traditional equities.
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