BY GARY CORCORAN
The outlook for inflation is
benign. It is not seen as a
real threat in the short term
by investment managers of
any hue, and there are
very few expressing concern
over the Governor of
the Bank of England having
to write to the Chancellor
to explain why inflation
has surged ahead of its 2%
target.
As Robert Jukes, a global
strategist at Collins Stewart,
asked: “So what?”
Inflation has, however,
accelerated in the past few
months with the Consumer
Price Inflation (CPI) figure
surging from 1.9% in
November to 2.9% in
December, before rising
again to 3.5% in January.
The Retail Price Index (RPI),
including housing costs,
finished November at 0.3%,
rose to 2.4% in December,
with the most recent figure
showing a further increase
to 3.7% in January.
These headline numbers
show a staggering increase
in an incredibly short space
of time and are enough to
SPECIAL REPORT REAL ASSETS AS INFLATION HEDGE
The preparation for inflation
Experts think inflation is set to rear its ugly head at the end of 2010 at the earliest, but clients
are worried about it now and are turning to real assets as a hedge against it. Given
investment is all about how to anticipate what is going to happen, how much of a concern is
inflation and how can real assets today hedge against inflation tomorrow?
When I talk to
clients all round the
UK, their response
is that they all fear
massive inflation.
With anything to
do with financial
markets, they
virtually always think
we will get mowed
down by massive
inflation
“
”
Duncan Gwyther, chief
investment officer, Quilter
influence the high net worth
man on the street – as evidenced
by those who
manage their portfolios for
them – who feels nervous
about the speed of inflation’s
reappearance.
Duncan Gwyther, chief
investment officer at Quilter,
says that a great number of
his own clients do see inflation
as a major concern.
“When I talk to clients
all round the UK,” he
explains, “their response is
that they all fear massive
inflation. With anything to
do with financial markets,
they virtually always think
we will get mowed down
by massive inflation.”
l Is inflation coming?
Investors cannot fail but to
have seen the headlines
about the billions of
pounds being pumped into
the UK economy, headlines
that have now been
replaced by more of a
whisper asking: “So what
happens now this money
flow has stopped?”.
Many are starting to raise
fresh concerns that strategies
put in place by central
banks across the globe –
such as TARP in the US
(troubled asset relief programme)
and QE in the UK
(quantitative easing) – to
reactivate the world economy
that are now being
unwound could result in
inflationary pressures.
But is this fear mis-
placed? Jukes is one who
holds the consensus view
within the investment
industry of interest rates
remaining low for the foreseeable
future.
“We are not overly concerned
about inflation
because we think that from
a policymaker’s view there
is unlikely to be any
medium-term risk that they
[the Bank of England] are
going to want to raise rates
to respond to,” he says.
There are those, like
Simon Gibson, a director at
Atkinson Bolton Consulting,
who echo the sentiment
saying that we could get to
4% in the coming six
months, but Gibson adds
that it will probably come
down to at or below its 2%
target by the end of 2010.
The reasons behind the
recent rise in inflation are
to an extent easily
explained and point to it
being a short-term issue
Nominal versus real gold price
rather than an upward,
rising trend. In his letter of
15 Feb to the Chancellor,
the Governor of the Bank
of England, Mervyn King,
outlined the three shortrun
factors that have driven
the current measured rate
of inflation up.
l Short-term drivers
“First, the restoration of the
standard rate of VAT to
17.5% is raising prices relative
to a year ago,” he
wrote. “Second, over the
past year, oil prices have
risen by around 70%. That
is pushing up petrol price
inflation significantly,
which, in turn, is raising
overall CPI inflation.
“Third, although the
exchange rate has been
broadly stable over the
past year, the effects of the
sharp depreciation of sterling
in 2007 and 2008 are
continuing to feed through
0
’74 ’80 ’86 ’92 ’98 ’04
Source: World Gold Council; London Bullion Market Assoc;
UK Office for National Statistics
MARCH 2010 [www.portfolio-adviser.com] PORTFOLIO ADVISER
800
600
£ 400
200
Nominal gold price (£/oz)
Real gold price (£/oz)
’10
21
To view a Ceros magazine you need to have JavaScript enabled in your browser and have the flash player 8 or higher installed. To install the latest flash player, click the icon above, install the flash plugin and then click here to refresh this page.