Schroders Investment stated that with inflation expected to fall in 2024 and 2025, investors need to reconsider their investment portfolio allocations.
The report pointed out that the significant decline in US inflation in 2023 has increased expectations for large-scale interest rate cuts by the Federal Reserve. However, Fed Chairman Powell recently indicated that achieving the 2% inflation target will take more time. It is projected that the inflation rate in 2024 will fall to 2% to 3%, with the Consumer Price Index (CPI) in 2025 likely to approach the 2% target.
In different inflation environments, the performance of stock sectors varies. During high inflation, most defensive industry sectors outperform others, as the goods and services produced by these industries are necessities and have inflation-resistant capabilities. Cyclical industries like energy and finance usually perform well in times of high inflation. In a low inflation environment, technology stocks and non-essential consumer goods stocks perform better as falling inflation leads to lower interest rates. Technology stocks rely on future earnings forecasts of enterprises and are sensitive to rising interest rates.
Schroders Investment pointed out that in a high inflation environment, stocks with higher defensiveness perform better, with lower volatility and higher dividend stocks holding more defensive industry shares. High dividend yield indices and value stock indices hold a higher proportion of energy stocks and benefit from rising inflation. In a low inflation environment, growth and quality stock categories perform better. Small-cap stocks tend to perform relatively well in times of high inflation, while they underperform large-cap stocks during low inflation. As inflation gradually falls, growth stocks and technology stocks are expected to outperform the broader market.
Currently, the US inflation rate is at 3.5%, within the range of 3% to 5%. In this inflation environment, defensive stock types and investment methods, as well as cyclical industry sectors such as energy and finance, generally perform better. On the other hand, growth, technology, and non-essential consumer stocks are usually weaker. However, as inflation has gradually fallen below 5% over the past year, these stocks have shown signs of improvement due to earnings improvement. The bank expects the inflation rate to drop to 2% to 3% in 2024, with growth stocks and technology stocks likely to outperform the market.