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The rapid rise to prominence of fiscal stimulus in 2020 is unlikely to be temporary. Monetary policy is no longer enough to stimulate economies by itself. This environment brings its own balance of risks, with the range of potential inflation regimes now broader than it has been for decades.

This is important context for portfolio construction. Many standard strategies (e.g. 60/40 stock/bond portfolios), which have achieved efficient risk/return outcomes over the last decade (or were even the best performer), could rapidly come under pressure. This recent performance has led many investors to dismiss inflation risks and under-allocate to assets that could protect future real returns.

Whilst we are not advocating that investors take an outright view regarding inflation; we do believe that the balance between disinflationary and inflationary forces is shifting. It is therefore vital to question if portfolios have enough protection to weather realistic future scenarios, noting that these may be very different from more recent history.