Global Plays on Inflation for 2022

When considering portfolio allocation, it’s important to keep in mind the wide dispersion of returns among economies. Dina Ting, Franklin Templeton’s Head of Global Index Portfolio Management, assesses the recent dislocation among global equity returns, with a look at one notable inflation outlier—Japan.

In this first of a series of country-specific perspectives, we offer our views on inflationary drivers and factors such as policy responses, wage growth, pricing power and sector exposure for context on how global investor returns may fare. What follows is an excerpt from a longer topic paper, which is available for download here.

The late Nobel Prize-winning economist Simon Kuznets once purportedly said there are “four types of countries in the world: developed, undeveloped, Argentina and Japan.”

Think what you will of that quip. But those two economies continue to mystify. Despite efforts by policymakers, Argentina remains mired in chronic hyperinflation and Japan is still contending with the stubbornly low inflation that leaves it an outlier amid trending record high rates.

These may be extreme examples, but they’re a good reminder that inflation levels across different nations span broadly even now. So, for investors weighing tactical tilts to global asset allocation targeted by country, it’s worth looking into such macroeconomic forces.

Resurgent inflation has become nearly as prevalent across the globe as the coronavirus itself, but not all nations are rushing into a tightening cycle. In addition to differing policy responses, we also saw a wide dispersion in 2021 returns among regional equity markets.