Home ListingJanuary 6, 2014

Inflation: the Surprise of 2014?

<em>Investors have voiced inflation concerns—but are they worried in the wrong direction?</em>

Reported by Featured Author

(January 6, 2014) – Despite governments’ strategy to inflate themselves out of debt, the lack of an upwardly moving price index could be the surprise of 2014, according to some market commentators.

“Our forecast is for inflation to remain low in 2014 and we see global inflation inching down from 3.8% to 3.7%,” analysts at investment bank Societe Generale said in a note to the market today.

“Across the major central banks, low inflation is triggering concerns,” the note said. “The textbook recovery scenario would suggest first a pick-up in employment and then, as spare capacity in the labour markets is absorbed, higher wage growth. However, even as the recovery is gaining traction (albeit at varying speeds), inflation has generally surprised on the downside in the advanced economies.”

The analysts said this lack of upward movement could have a dramatic effect what the market expects to see happening with monetary policy.

In Russell Investments’ New Year global outlook, the consultant and asset manager warned investors of a market consensus on low inflation, especially in the US for 2014.

BlackRock’s Global Chief Investment Strategist Russ Koesterich added: “With rates likely to rise and inflation still low, we would avoid both long-dated treasuries and Treasury Inflation Protected Securities.”

In the Eurozone, most market commentators believed there would be little chance of rising inflation. Societe Generale’s analysts even foretold further interest rate cuts to try and boost its economies.

Russell’s note was more upbeat, although had a similar view on inflation: “We believe 2014 will be a year to remain invested [in the Eurozone], but not to just buy and hold. With respect to bond yields, we think the core countries will participate in the rising rate environment of the developed world, however, at a slower pace because of lackluster growth and low inflation.”

However, long-term investors are plunging into assets that should protect their portfolios when inflation finally picks up.

The UK’s National Association of Pension Funds revealed at the end of last year that more than a third of its members were invested in commercial real estate and a further 11% had considered it. In addition, 23% of defined benefit funds had made some investment in infrastructure, with a further 18% actively considering it.

Large sovereign wealth funds, including Norway Government Pension Fund-Global and Singpore’s GIC, have been buying up great swathes of real assets. They believe the regular, often inflation-linked cash flows provided by these assets should help their total return targets.