Inflation a hurdle for advisers this year

The threat of inflation looks set to return after a couple of quiet years, and price rises are predicted to have a significant effect on investment portfolios.

Tuesday, March 11th 2014, 6:00AM

by Niko Kloeten

Annual Consumer Price Index (CPI) inflation is back up to 1.6% after dropping to 0.7% in the June quarter last year, the lowest level of inflation since 1999 and below the Reserve Bank’s target range of 1-3%.

In its latest forecast, the BNZ predicted the CPI would rise above the top of the target range, reaching 3.1% by 2016 and forcing the Reserve Bank to hike interest rates.

Christian Hawkesby, head of fixed income at Harbour Asset Management, said inflation risks were on the up-side looking forward and it’s not a stretch to suggest inflation could top 3% within a couple of years.

“We’ve gone through a period when inflation has been unusually low in New Zealand, below the bottom of the target range,” he said.

“Over the past few quarters it’s been heading back towards the middle of the target range – 1.6% is not far off – and given the economic momentum we have you would expect it to increase as New Zealand runs out of capacity.”

Hawkesby said financial advisers and fund managers had a number of ways to protect against inflation risks, including a relatively new tool: inflation-linked bonds.

The New Zealand Debt Management Office re-started issuance of inflation-linked bonds in 2012 after a 13-year hiatus and Hawkesby said they look like good value.

The difference in yield between them and nominal bonds, known as the "break-even", is currently 2.15% and he said the liquidity of inflation-linked bonds had significantly improved recently thanks to the large amount of issuance.

“Two years ago if you’d asked me I would have said there’s no inflation-linked bond market in New Zealand but now we have one.”

Morningstar co-head of fund research Chris Douglas said the key to protecting against inflation was to have a diversified portfolio that could weather different market conditions.
“If you look back at history there are a number of asset classes that do well, including real assets such as property and infrastructure.

“Typically, regulated assets have got inflation adjustments in their pricing. And you’ve obviously got equities, which in some cases can be good and other cases can be bad. What we do know is that fixed interest doesn’t perform well in an inflationary environment.”

Douglas suggested taking a “granular” approach rather than just a high-level overview of the various asset classes.

Active management could take advantage of opportunities “but active managers can get it wrong,” he said.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

« Capital guarantee no silver bullet

IFA working on pro-bono offering »

Special Offers