Inflation and Industry Returns - A Global Perspective

Inflation plays a prominent role in global equity portfolio selection. While there is a substantial literature on the relation between inflation and aggregate stock returns in single markets, there is littleevidence on the effect of inflation on industry returns from a global perspective. In this paper, we investigate the interaction between global inflation and global industries. Sensitivities to inflation vary significantly across industries and tend to be higher for noncyclical industries than those of cyclical industries. Consistent with previous research, we also find that the negative relation between inflation and stock returns tends to diminish or becomes positive when longer horizon returns are examined. Longer term inflation information is more relevant for investors when considering equity investment decisions. Based on inflation sensitivities, we propose an inflation timing model which outperforms a global benchmark index. As global capital markets and economies become more integrated, we expect industries and inflation to be considered in a global context. Strategies such as the one we propose should be well suited to benefit from such integration.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1321440