SPECIAL REPORT REAL ASSETS AS INFLATION HEDGE
“
What is more,
asset prices are
likely to continue
rising this year,
while CPI will likely
moderate before
showing signs of
cyclical upward
pressure in
2011-12
”
Robert Jukes, global strategist,
Collins Stewart
explains that part of the
reason why inflation is not
a real threat in developed
economies is because it is
more to do with the output
gap than wage inflation.
“In emerging markets,”
she says, “the inflation
basket is more to do with
food prices and energy
prices so we could well be
heading into a situation
where there is asset price
inflation in certain parts of
the world, yet we still may
not see inflation measures
in the UK or US being used
that much.”
l Where to invest?
Jukes puts this into context,
saying that CPI and
RPI hikes at the end of last
year may have surprised
analysts, but over a similar
period the bigger rises
came from asset price inflation
in things like crude oil
(rising 54% year-on-year),
the FTSE 100 (up 24%) and
house prices (5.9%).
“What is more, asset
prices are likely to continue
rising this year, while CPI
will likely moderate before
showing signs of cyclical
upward pressure in 2011-
12,” he suggests.
It also depends whether
they want to protect their
portfolio from inflation, or
take advantage of it within
their portfolio.
What is key for those
investors who want to
ensure they are protected
against rising inflation is
that their portfolio is linked
to the right inflation. They
need to decide how each
type of inflation will most
directly affect them and, as
Hudson suggests, in effect
try an asset/liability-matching
exercise looking at what
is going to have the greatest
exposure to these inflationary
impulses.
She says: “If your inflation
is because a high proportion
of your income is
spent on fuel costs, or
entertainment, or school
fees, then those are the
inflations you should be
worried about. For Portfolio
Adviser’s readers, fuel bills,
food bills and phone bills
may not be as important,
but school fees could be.
Mortgage rates, for example,
are not necessarily
going to stay low just
because base rates are low.
“If you are digging right
down to it, you need to
look at each requirement
and find the thing that best
matches it. If it was utility
bills that are the greatest
inflation worry, then investing
in utility companies
might be an idea.”
On a global scale, what
will matter are assets like
agricultural price inflation,
which is also affected by
Bank of England interest rates – 25 years
%
15
12
9
6
3
0
’86 ’90 ’94
Source: Bank of England
’98
’02
the demand for alternative
fuels, which is in turn affecting
corn prices for ethanol
and biofuels. Here investors
can buy into the big food
companies, or fertiliser
companies, or irrigation
companies. It is also the
technology that supports
these areas that is likely to
experience price inflation.
l The gold standard
Above all, it is assets that
are exposed to inflation
themselves, with a chance
of increasing in price rather
than remaining at a fixed
price, that are the best protection
against inflation.
These are the so-called
‘real’ assets: property, commodities
and, above all,
gold.
“I would divide real
assets into two categories –
those where you have some
sort of grip on the current
price relative to a fundamental
valuation, like the
rental stream from property,
and those where you are
taking a view on a price,
such as commodities,” says
Gwyther.
He argues, for example,
that some investment managers
were persuaded to
go into commodities
recently on the back of the
structural change going on
in the demand for certain
commodities from the
industrialisation of China
and elsewhere. The logic
was that, irrespective of
valuations, the price of
most commodities that
China and others needed
was bound to go up.
Any conversation about
inflation and how it can
best be hedged will have
gold at the top of the
agenda, although the gold
price is linked to more than
just inflationary pressures. It
can be a hedge to inflation
and to the dollar; it reacts to
increased jewellery con-
sumption in China and
India; it provides diversification
in a portfolio; it
reacts to inflation and can
be an indicator of inflation
to come. Between 2001 and
the end of 2009, across
both good and bad market
and economic cycles, the
gold price rose every single
year, according to Juan
Carlos Artigas, an investment
research manager at
the World Gold Council.
The World Gold Council
argues a good case for
investing in gold under
almost any circumstances,
perhaps unsurprisingly,
with Artigas making the
point that gold can also add
value to a portfolio whether
inflation comes or not.
“We have seen a spike
in the price of gold, and we
see this as a lead indicator
of inflation, but it does not
necessarily mean that it is
going to happen,” Artigas
says. “What we find is if
inflation comes, gold will
protect you; but if not, or if
it does come but gets no
higher than say 3% or 4%,
having gold is a great diversifier.
So in some senses
you are buying gold as a
very cheap insurance
product.”
l Driven by greed
Gold is a store of value, it
cannot be printed and,
from an investment point
of view, it is not liquid.
Hudson describes it like an
investment in premium
bonds – “fun at the periphery
of the portfolio, but
you cannot rely on it to do
a job. And it does not have
an income...”
Stephan Mueller, executive
director at Julius Baer
Precious Metal Funds, is
even more strident in his
view of gold being for protection
only and not for
positive returns, saying:
“Gold is pretty much driven
24 PORTFOLIO ADVISER [www.portfolio-adviser.com] MARCH 2010
’06
’10
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