Inflation starts to stir
There are signs that inflation might be stirring again, bringing a need for investors to think about repositioning their portfolios.
Tuesday, April 27th 2004, 12:04PM
Arcus chief investment officer Mark Brighouse sees the continuing strong growth for commodities, driven by increased global demand, as the key cause of the change in outlook.
"This increased demand from Asia is creating shortages in other countries which are leading to price rises." he says.
In addition, the low US dollar is putting upward pressure on price of consumer goods in the US, keeping the prices of cars, electronic goods and home appliances from falling in spite of fierce competition.
"This is particularly disturbing, because it is these types of goods that have contributed significantly to the decline in inflation over recent years."
Brighouse says how far prices rise will depend on the pricing power of individual firms.
"Service sector firms have been demonstrating for some time that they can put prices up. Now, we are also seeing manufacturers extract price rises."
He doubts, however, that inflation will return to the double-digit rises of the 1970s and 80s.
"Inflation may reach 3 per cent or 4 per cent in developed countries, signaling an end to inflation declines but not the start of sharp rises."
But the shift is significant in terms of investment strategy, causing Arcus to revise its portfolio weightings. It is moving away from an over-weighted exposure to global equities to take a more conservative stance. In Australasia, Arcus is becoming more selective ahead of the expected cooling of the housing markets.
"While sectors such as retailing may suffer, we see further upside in sectors such as basic materials, insurance and infrastructure construction. Although valuations remain favourable and we are overweight, we believe it is prudent to trim exposure in this asset class."
"Property assets are a concern, as capital prices have outpaced rentals over recent years. However, our portfolios contain a greater weighting to infrastructure assets, which are much more compelling. We are maintaining an investment in this sector but are mindful of the impact of rising interest rates."
"Our real concerns are with corporate bonds and other fixed income securities. Investors are not being adequately rewarded for the interest rate risk and credit risk in securities which may perform poorly in a rising inflation environment."
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