Portfolio diversification requires a procyclical inflation regime

We think the positive correlation between bond and equity returns will last as long as positive inflation shocks are cost-push (vs demand pull), as a negative stock-bond correlation needs a weakly procyclical inflation regime.

What you will learn:

• As inflation begins to moderate, rates will peak, and we expect the term premium to decrease again, in line with long-term secular drivers. Bonds will deliver strong returns, coinciding with a more challenging environment for equities due to moderating growth.
• Thus, even before the next monetary policy easing cycle begins, we expect the stock-bond correlation to gradually return to negative territory, delivering portfolio diversification benefits once again.