VIEWS ROUND-UP
views round-up
Inflation-busting tactics
UK inflation rose to a 14-month high of 3.5% in January. Is this just a
temporary spike or a sign of things to come? And, if inflation really is
on the rise again, which asset classes give your portfolio the greatest
protection against its damaging effects?
MEERA PATEL, SENIOR
ANALYST, HARGREAVES
LANSDOWN
We think inflation is a
short-term phenomenon,
and in the second half of
this year it is going to be
far more subdued than it
has been in January and
February.
Equities in general can
offer some protection
against inflation because of
the capital growth prospects
on offer. But if you
then add the income element
to it and reinvest that
income, the compounding
effect you get as the result
is a compelling argument
for investing in equity
income, because compounding
is great protection
against inflation.
It is all about the power
of compounding income at
the end of the day; that is
what helps you protect
against inflation.
It is the real value of
your money that is growing
and it is not being
eroded because it is growing
far more than the level
of inflation.
Aside from UK equity
income funds, I think it is
really worthwhile investors
considering overseas funds,
such as the Bloxham
Global Equity Income Fund
or the Ignis Argonaut
European Income Fund.
Gold does offer protection,
particularly in the current
environment. Inflation
aside, it also offers protection
against uncertainty in
sterling and other
currencies.
Poll: asset class protection against inflation
Gold 14%
Index-linked
bonds 26%
Property 18%
Others 4% Gilts 2%
Source: The reader poll on www.portfoltio-adviser.com
Commodities 18%
Equities 18%
Property is another way
to diversify, particularly
because of the yield element,
which is about 7%-
8% at the moment. With
RPI inflation at 3.7%, it
sounds very attractive.
However, while we
have gone marginally positive
on property in terms
of long-term prospects, we
are not out of the woods
and there is still an element
of uncertainty, as in
commercial property we
are not seeing rents going
up yet. Property still makes
up a very small element of
my diversification.
Corporate bonds is
another area, but you must
be careful because we
have seen a lot of strength
there. If inflation does carry
on rising, then the authorities
are going to have to
step in and raise rates,
which is not good for corporate
bonds with the
inverse relationship there
as well.
ALAN STOKES, FUND
MANAGER AND DIRECTOR,
BROOKS MACDONALD
We have been holding
index-linked bond funds
for some time because
inflation is a worry. I have
been holding Legal &
General Index-Linked Gilt
SIMON WARD, CHIEF
ECONOMIST, HENDERSON
GLOBAL INVESTORS
I am probably more worried
about inflation than
most economists. I think
the consensus agrees with
the Bank of England that
this recent pick-up is a
temporary spike, but
people were saying the
same thing a year ago.
At that time, it was forecasting
that inflation would
fall back to 1.25% by now
and this has not happened.
There were two things
wrong with its forecast:
■ first, the Bank of England
put too much emphasis
on the idea that spare
capacity in the economy
would weaken firms’
pricing power.
■ second, it underestimated
the impact of the
weaker pound.
Looking forward, I think
both of those are going to
continue to apply over the
next year, so although
there is spare capacity in
the economy, it is not
having the disinflationary
affect it perhaps had in
Index Trust for two years,
because this is a cost-effective
way of playing the
index-linked gilt market.
There are also a number
of global inflation-linked
bond funds, offered by the
likes of Schroders, Standard
Life and Royal London. I
think we are going to see
more exposure in these
markets.
I have also held in our
Oeic the City Financial
Strategic Gilt Fund, which
has been trading in and out
of index-linked gilts and
has given us some protection
on the inflation front.
In terms of commodities,
price rises have been
previous economic cycles.
I also think that with the
pound at this very low
level we will continue to
see upward pressure on
traded goods prices.
We will not see a significant
fall in inflation. It will
come down to some extent,
partly as base affects from
petrol prices rising last year
drop out of the comparison,
but it will remain
above the 2% target for the
foreseeable future.
The January figure of
3.5% will be the peak for
this year, and it will come
down to 3% for the next
few months.
If at some point in the
next few years we saw a
sharp pick-up in inflation
to well above the current
levels – 5% or so – then
historically that has not
been great for any asset
class apart from indexlinked
bonds.
But if we are looking at
more of a creeping inflation
scenario – which is
more likely – then you can
get a decent dividend yield
on equities and your capital
ought to be protected
over the long term.
Also, I think National
Savings & Investments
Index-Linked Savings
Certificates look reasonably
interesting as they are
offering 1% real tax-free
returns and it is going to
be difficult to get anything
like that from a bank or
money market fund.
driven by the Chinese, but
I do not think they will
keep buying if it keeps
pushing up the price.
I bought the Premier
Pan European Property
Share Fund last year as a
diversifier, but also because
it had a strong yield.
Run by Alex Ross, it has
offered yield close to what
we were getting from the
bond market.
Bricks and mortar funds
is an area we generally like
to have exposure to, and it
is interesting to see that the
New Star International
Property Fund has reopened.
It is an area we
will follow closely.
12 PORTFOLIO ADVISER [www.portfolio-adviser.com] MARCH 2010
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