Equity Price Sensitivity and Expected Inflation

Abstract

The authors specify a regression model for equity price sensitivity, and using this model identify several factors that determine how sensitive the equity price will be to changes in expected inflation. Results suggest that portfolio managers who believe expected inflation will increase significantly should tilt their portfolios toward low-yielding companies making significant investments in real assets and rely heavily on nominal contracts as a funding source.

TOPICS: Fundamental equity analysis, real assets/alternative investments/private equity, portfolio construction