60 seconds with Marcus Brookes on the inflation conundrum facing investors

2016 has seen tentative signs of a pick-up in inflation, particularly in the US, but should investors start to balance their portfolios towards the beneficiaries of inflation?

11 April 2016

Marcus Brookes

Marcus Brookes

Head of Multi-Manager

The current economic recovery that started in 2009 can be characterised as one of low growth and low inflation, relative to previous recoveries.

Intuitively that is correct: if there is low growth then there’s low demand; if there is low demand for goods and services then it is pretty unlikely that the prices of those goods and services can rise, which suppresses inflation.

A low growth, low inflation environment has benefitted:

  • Utilities
  • Pharmaceuticals
  • Tobacco

So, if your forecast is for that to continue, then that style of portfolio will probably continue to perform well. In 2016, however, we are just starting to see signs that inflation levels are picking up.

In the US, the latest CPI (consumer price index), excluding food and energy, is 2.2%, which is close to the Federal Reserve’s target. If this is no more than a spike then investors probably won’t need to do anything.

However if this is evidence that the environment is changing then maybe a different portfolio is needed for this different environment. Inflation beneficiaries are more likely to be:

  • Emerging markets, which have been in a bear market for around five years
  • Gold
  • Broader commodities, including oil

If the scenario is changing then the balance of portfolios might need to be adjusted towards the beneficiaries of inflation.

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