Inflation is presenting a ‘challenging environment’ for investors as different countries see different inflation trends, a Standard Life fund manager has said.
Jonathan Gibbs, fixed interest investment director at Standard Life, said prior to the financial crisis major economies experienced rising prices in similar ways, seeing stable growth and low inflation.
“This stability has now disappeared: different countries are showing very different paths while inflation concerns are much greater.”
Gibbs said governments were responding to the challenge in different ways, with policy in the US still aiming to stimulate economic growth, fiscal restraint in the UK but low interest rates, while China and other Asian central banks have been ‘tightening policy for many months.’
The difference in approach is largely down to some economic fundamentals, such as the strength of economic growth and employment levels.
External inflation factors
“The second major contributor to this divergence is the fact that much of what is driving inflation in the major economies is now generated externally. The rise of the emerging nations in the East has huge implications, and not simply for raw commodity markets,” Gibbs said.
These external factors are hard for domestic authorities to control, but there is some concern about inflation expectations driving up prices and wages over the longer term.
Gibbs, who runs a global inflation-linked bond fund, said the fund was choosing between inflation linked bonds issued by different countries aiming to exploit changes in inflation and interest rate expectations.
Such bonds are an asset with a link to inflation, which should correlate poorly with other assets like equities or property and can be a diversifier in a multi-asset portfolio.
Inflation in Asia
Tim Dickson, Asian equities fund manager at Invesco Perpetual said earlier in May that inflation in the region had not peaked, but was getting closer to that point in some countries.
“We have seen food prices pick up and some very rapid credit growth, but these are both now coming back under control,” he said.
Monetary growth in China has returned to a more sustainable level following tightening measures by the Chinese authorities, with inflation potentially reaching a high point this year.
Dickson said he was more concerned about inflation in other countries, such as India.
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