01 September, 2011
Real returns from different asset classes for investors in the euro area and the US.
The focus of this article is to understand the performance of inflation and inflation hedges for the Eurozone and to compare and contrast the performance with that of the US. The analysis results in three major conclusions.
First, to date in the 21st century, inflation has been low but not negligible. However, the performance of both TIPS in the US and GILB in the euro area indicates that investors expected otherwise. [Note: the performance of the Dow Jones Long-Term Inflation Index, which aims to provide a measure of the long-term inflation expectations in the US by capturing the difference in performance between the 30-year US TIPS and the 30-year US Treasuries, is a testament to this fact.]
Second, of all the asset classes analysed, commodities provided the best inflation hedge both in the US and euro area. In both the regions, energy was a big driver of the hedging capabilities of commodities while precious metals also played a role in the US.
Third, the composite real asset strategy was more successful at hedging inflation in the US than in the euro area. This is because inflation was more highly correlated with real assets within the US than in the euro area. This seems to indicate that inflation hedges within the euro area might differ from those in the US and suggests that the search for real assets within the euro area requires more research.
Sarah Paretti provided extremely able research assistance.