Many of the best places to hide during 2022's inflation shock were in core real assets, such as infrastructure, transportation, and timberland.
Conflicting macroeconomic signals around slowing growth and persistent inflation have fuelled market volatility in 2025. Shifting tariff and fiscal policy developments have added to this uncertainty. As a result, the traditional relationship between equities and bonds has become less reliable, reinforcing the need for alternative sources of portfolio diversification.
One risk that warrants close attention is a renewed inflation surge. Rising tariffs and trade barriers represent a classic negative supply shock. At the same time, fiscal policy is taking a more expansionary turn. The Republicans’ budget bill frontloads stimulus, with near-term tax cuts offset by spending cuts that are largely pushed further out beyond the end of President Trump’s second term. The potential interaction between supply constraints and renewed fiscal stimulus bears uncomfortable similarities to the post-pandemic surge in inflation.
This raises an important question: what did we learn from the 2022 inflation shock, and how should investors protect against this tail risk?
The first lesson, which was particularly uncomfortable for investors, was that neither stocks nor bonds like inflation and so inflation shocks undermine traditional diversification. Investors were left with few effective hedges across liquid traditional asset classes in 2022 (see Exhibit 22).
Our second lesson was that many of the best places to hide in the event of inflation were in core real assets, such as infrastructure, transportation, and timberland (see Exhibit 23). Core real assets are defined by their ability to generate stable, income-oriented returns backed by long-term contracts, regulatory frameworks, and/or essential service provision. Their limited sensitivity to economic cycles and explicit or implicit inflation linkage makes them particularly resilient in inflationary periods.
In core infrastructure, for example, regulated utilities and contracted renewables benefit from inflation-linked revenues, cost passthrough mechanisms, and often a regulated return on equity that increases with inflation. In contrast, merchant power plants or greenfield developments – common in more opportunistic strategies – lack contracted revenues and carry construction or market risk, making their inflation protection less reliable.
In transportation, core strategies typically involve ships or aircraft leased under long-term time charters to investment grade counterparties, generating predictable, often inflation-adjusted cash flows. These arrangements shift operational and market risk to the lessee, reducing investors’ exposure to the volatility of spot markets. By contrast, non-core strategies may involve vessels operating on short-term or spot leases, where revenues fluctuate with shipping rates that are highly sensitive to trade cycles.
Timberland can also offer strong inflation protection, as timber and land prices have historically risen with inflation. Managers can defer harvesting during weaker markets and sell when prices are more favourable. Meanwhile, as trees continue to grow, the volume of harvestable timber increases, providing a naturally compounding source of return.
For investors who cannot access core real assets, gold can serve as a partial substitute. While gold underwhelmed in 2021–2022 despite high inflation, its more recent rally underscores its value as a hedge against geopolitical uncertainty and questions around the long-term status of the US dollar. Unlike income-producing real assets, gold offers no yield, but it often acts as a store of value in periods of systemic stress. We therefore view gold as complimentary to other core real assets within a diversified portfolio, offering a different, more liquid form of protection that is particularly relevant when confidence in fiat currencies or global institutions wavers. We must also, however, recognise that after a 40% rally over the past 12 months, it appears that a lot of these concerns are already well reflected in the gold price.
Investors should also consider leaning into strategies that can capitalise on these conditions. Liquid alternatives – particularly macro hedge fund strategies – are designed to perform independently of market direction, and tend to benefit from dislocations, interest rate divergence, or increased policy unpredictability. Historically, these strategies have tended to deliver stronger relative performance in similar conditions. While not a substitute for structural inflation hedges, liquid alternatives can help reduce overall portfolio volatility, limit drawdowns, and enhance diversification at a time when traditional asset class correlations are more unstable.
These lessons remain relevant in the current environment, and we therefore believe that portfolios should be constructed with two-sided risks in mind. Core bonds remain essential for hedging recession risk, while core real assets offer long-term protection against inflation and serve as tangible stores of value in an environment of elevated macroeconomic volatility and growing concerns around fiat currency stability.
At the same time, liquid alternatives – particularly hedge fund strategies with low correlation to traditional assets – can provide an additional layer of diversification, helping to capitalise on volatility, limit drawdowns, and act as ballast during periods of market stress. Together, these alternative tools can help build more resilient portfolios in a world where inflation and growth risks are more evenly balanced than in the decade prior.