Investment Briefing 2010 Q3

Dealing with the Fear of Inflation

One matter currently occupying trustees’ thoughts is the fear of inflation and the extent to which their investment strategies are prepared for a potential shift to problematic levels of inflation.

The traditional way of protecting against inflation is to buy index linked government bonds, but this approach can be expensive given the low yields currently available. Another approach is to take a multi-asset view and consider not just inflation linked government bonds but also other assets such as equities, commodities and property that are linked, directly or indirectly, to UK price inflation. The potential of this approach is that when inflation expectations are rising, investors can seek protection but also take advantage of opportunities at the same time.

Is now a good time to be considering these other assets? Are we close to the bottom in the current cycle of government bond yields? This last question cannot be answered with any certainty of course and indeed it would be possible for real yields on government index linked bonds to become negative i.e. return a yield lower than inflation. However, with government bond yields so low, those trustees who have some capacity to accept greater potential short term volatility may feel that now is a good time to consider whether to change the balance between their growth and liability matching assets.

If trustees are considering changing their investment strategy they should seek advice from their investment adviser.

2010 Q3 Market Commentary

A strong recovery from equity markets following the set back in the previous quarter. Asia Pacific (+14.9%) and UK equities (+13.6%) were the strongest performing sectors.

Fears about the slow pace of economic recovery led to announcements of further Quantitative Easing (QE2) which helped to drive bond prices higher.

The sterling return from overseas equity markets was heavily influenced by currency movements (Europe ex UK returned +7.2% in local terms and +13.4% in sterling terms, whilst US returned +11.3% in local terms and +5.7% in sterling terms). The prospect for currency wars between developed and developing economies continues to be a topic of debate.

Further information

The full investment briefing for 2010 Q3 can be found on our website along with our past investment briefings. Please contact us should you require any further information.

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