Investors need to look beyond the tradition equity-bond portfolio model if they want to deliver positive real returns, given the “clear” but “inconsistent” impact of inflation, according to new research from Aon.
The research paper, Invest in a Shifting World: Inflation Regimes and Market Realities, warns professional investors that sudden inflationary shocks can wipe out many years’ accrued value in a single year, so investment strategies need to reflect this potential danger.
In this research, Aon analyses the performance of equities, fixed income, property and gold across five inflation-growth regimes observed over the past 40 years. It concludes that while inflation affects all asset classes, outcomes are rarely predictable, particularly when inflation and growth disconnect from the norm.
In concludes that safeguarding against short-term shocks is difficult without compromising exposure to higher returning assets and as a result says well-diversified portfolios can be the most effective strategy for those with higher investment objectives.
The paper identifies two types of inflation as most disruptive: sudden inflationary shocks and sustained periods of above-average inflation. Both, it argues, can materially erode long-term portfolio value unless investors build in more efficient diversification.
Aon’s analysis suggests equities and property deliver mixed outcomes depending on growth conditions, while fixed income performs poorly in high-inflation environments. Even gold, often positioned as an inflation hedge, behaves unpredictably in periods of heightened geopolitical tension.
The paper highlights the importance of understanding the interplay between inflation and GDP growth, rather than treating inflation as a standalone risk. It notes that “average inflation, average growth” conditions have historically delivered the most stable returns, while years such as 1980, 1991 and 2022 produced major market dislocations.
The firm cautions against relying too heavily on credit, describing it as vulnerable to inflation erosion over time and increasingly correlated to equities during crises, limiting its diversification value when it is most needed.
To illustrate the point, Aon models a diversified portfolio combining equities, fixed income, property and gold. Over the five years to 31 March 2025, the model delivered annualised returns of 9.4 per cent despite the inflationary volatility of the post-pandemic period, including the broad-based market sell-off of 2022.
Aon concludes that investors should expand opportunity sets and build portfolios designed to cope with multiple inflation regimes, rather than attempting to predict the path of inflation. “There are no hiding places,” it argues, adding that diversification remains the most effective defence against inflation risk.
