Dynamic Asset Allocation in an Inflationary Macro Regime

Abstract

Chronic inflationary forces have also transformed the world investment scene and require new, more dynamic investment strategies. This article focuses on how dynamic asset allocation (DAA) can guide investors through periods of inflationary macro regimes, where they will since have to balance their goals of making returns with increasing exposures to risks. On the theoretical basis of asset allocation, the paper examines the sensitivities of the various asset classes in terms of equities, fixed income, real assets, and alternatives to inflationary shocks. It also examines the more practical allocation strategies like sector rotation, factor based strategies, and more tactical responses to changing monetary and fiscal policy. Combining the review of recent institutional activities and the case analysis, the study proves the necessity of diversification, hedging instruments, and scenario analysis in correlation with inflation-related volatility. The results indicate that DAA as formulated within the context of macroeconomic indicators and applied to risk management systems is a robust means of preserving capital and opportunity processing amidst uncertain times. Policy and strategic implications are provided to asset managers and institutional investors as well as regulators of the asset management industry and highlight the importance of flexible frameworks capable of accommodating investment decisions as macroeconomic realities change.