Inflation warning from Fisher

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Fisher Funds has issued an inflation warning to investors.

Tuesday, April 30th 2013, 6:00AM 1 Comment

by Susan Edmunds

At a quarterly investment briefing in Auckland, Carmel Fisher, chief investment officer Mark Brighouse and David McLeish, the senior portfolio manager of fixed income, pointed to the over-supply of cash in the economy. They noted that slow growth in consumer spending meant interest rates stayed low and Governments were printing money but corporates and banks had more cash than they knew what to do with.

There were signs that investors were looking for riskier investments, they said.

Since the end of last year, $148 billion had been moved into equities, from bonds and cash. The March quarter was the best on record for developed markets’ equity funds, with bigger inflows in the quarter than bond funds for the first time since 2007.

But Fisher said despite a hot year, there was no danger of a bubble forming on the sharemarket yet, as investors had been so hesitant to invest since the global financial crisis. “We’ve got a long way to go.”

Fisher Funds reported that inquiries about managed funds were three-and-a-half times as frequent in the first four months of this year than in the same time last year.

Fisher said it was a concern that some investors were simply chasing returns and investing with the crowd. “If investors are marking investments because they’re rising at the moment, and everyone else is buying them, they should prepare to lose money.”

Brighouse said there had been no major change in investment strategy. “Despite equity markets having had a strong run, we are not allocation away from them in a big hurry.”

He said cash that had been “on the sidelines” was being put to work.  “There are large amounts in term deposits in New Zealand which suggests the potential for further allocations to equity from cash. We don’t subscribe to the view that money is rotating out of bonds and into equities.”

Brighouse said central banks were absorbing some of the risks that would usually be at play in the market, such as interest rate fluctuation. But he said investors should not be lulled into a false sense of security, misjudging the degree of safety. “That’s why the discussion of the Mighty River Power risks is so timely.”

Markets are unconcerned about inflation.  But the Fisher Funds team warned that profligate countries could create hyperinflation and most developed world countries need inflation to stabilise their Government debt ratios.

Brighouse said the “massive” amount of quantitative easing that was being done to offset a slowing in other monetary indicators increased the  risk of inflation down the track. “It’s worth thinking through how different assets would react if inflation was a little bit higher. It’s not an easy thing to hedge against.”

In an inflationary situation, bonds and fixed deposits would suffer.  And even equities were not a sure bet, McLeish said. “Quickly-rising inflation often brings with it higher volatility. This in turn raises the equity risk premium and discount factor.”

He said gold was too volatile to be a useful hedge – as illustrated by its dramatic drop last week. The Fisher team said real property returns were the least inflation-sensitive but their values lagged traded assets and were illiquid and difficult to diversify.

Fisher said her organisation would be investing in Mighty River Power. She said the Labour/Greens nationalisation policy that sent shockwaves through would-be investors might never be implemented, and if it was, it was so far out that it was impossible to quantify the risk.

It was the first time that TOWER Investments’ quarterly briefing had been conducted by new owners Fisher Funds.

Fisher said that over the next three to six months, her organisation would be looking at the spread of TOWER products on offer. She said some of its smaller funds were not efficient and investors were paying for it through higher fees.

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