How to ride the re­turn of in­fla­tion

The Daily Telegraph - Your Money - - YOUR MONEY -

A weak pound will boost the cost of liv­ing. In­vestors can ben­e­fit if they adopt the right strat­egy, writes Sam Brod­beck

Asharp fall in the value of the pound since Bri­tain voted to leave the EU and a re­cov­ery in the price of oil mean that savers’ great­est en­emy – in­fla­tion – is about to make a come­back. Opin­ions dif­fer as to the level it will reach and whether it can be sus­tained, but in­vestors should be plan­ning to hold the right as­sets to guard against any havoc caused by ris­ing prices.

The Gov­er­nor of the Bank of Eng­land, Mark Car­ney, has al­ready heaped pres­sure on savers by cut­ting the Bank Rate to a new record low, rapidly fol­lowed by the banks. Un­for­tu­nately, there is no guar­an­tee that this will be the end of it as Mr Car­ney’s deputy, Ben Broad­bent, has sig­nalled that fur­ther cuts could be made be­fore the end of the year.

In­ter­est rate cuts cou­pled with in­fla­tion make a deadly com­bi­na­tion and do­ing noth­ing could see your hard-won in­vest­ment gains slowly eroded.

In the wake of the ref­er­en­dum the pound crashed to a 30-year low against the dol­lar – at the start of June £1 was worth a shade un­der $1.50 and is now hov­er­ing near $1.30.

The weak pound has helped to push up the FTSE 100 in­dex of the largest com­pa­nies in the UK – many of these firms op­er­ate in­ter­na­tion­ally and have ben­e­fited as their goods be­come cheaper and their over­seas earn­ings ap­pre­ci­ate in ster­ling terms – but the spec­tre of in­fla­tion now looms large as im­ported goods be­come more ex­pen­sive.

For­tu­nately, econ­o­mists are not pre­dict­ing the kind of run­away in­fla­tion seen in Bri­tain in the Sev­en­ties, when at­tempts by the gov­ern­ment to con­trol wages and prices led a min­ers’ strike, power cuts and the three-day week.

Ex­perts say this lat­est bout of in­fla­tion is more likely to hover around the Bank of Eng­land’s tar­get of 2pc – a level not seen since 2013.

An­thony Gill­ham, of Old Mu­tual Global In­vestors, said a com­bi­na­tion of a weak­en­ing pound, the pickup in the oil price and growth in UK earn­ings meant mar­kets were ex­pect­ing a rise sooner rather than later.

Mr. Gill­ham said that, us­ing the in­fla­tion-linked bond mar­ket as a proxy, an­nual in­fla­tion was pre­dicted to run at 2.6pc on av­er­age for the next five years. But even if the rise in the cost of liv­ing proves to be short lived, in­vestors will want to po­si­tion them­selves to boost their port­fo­lio while the op­por­tu­nity is there.

In a mar­ket of ris­ing prices, cash and bonds are the most vul­ner­a­ble as­sets. In­vest­ing in the stock mar­ket, how­ever, is not nec­es­sar­ily a fool­proof way to deal with in­fla­tion as some com­pa­nies are more ca­pa­ble than oth­ers of pass­ing on higher costs and safe­guard­ing profit mar­gins.

Adrian Low­cock of in­vest­ment com­pany Ar­chi­tas said firms that sell sta­ple goods – such as su­per­mar­kets, to­bacco and util­i­ties – could raise cus­tomers’ prices with lit­tle drop in de­mand. Stocks in busi­nesses that sell lux­ury items, ex­pen­sive elec­tronic equip­ment and hol­i­days were likely to suf­fer far more.

He picked out Neil Wood­ford’s Eq­uity In­come fund as a way to in­vest in re­silient firms be­cause of its fo­cus on strong com­pa­nies with grow­ing sales and high ex­po­sure to tra­di­tional “de­fen­sive” sec­tors such as to­bacco and phar­ma­ceu­ti­cal com­pa­nies.

He also favoured the M&G In­fla­tion Linked Cor­po­rate Bond fund, which, as the name sug­gests, in­vests in bonds whose re­turns are pegged to the rate of in­fla­tion.

Ja­son Hol­lands, of fund bro­ker Til­ney Bestin­vest, rec­om­mended fo­cus­ing on growth busi­nesses and “real as­sets” such as gold or land where “the sup­ply can’t just be in­creased out of thin air”, un­like money.

He added: “There are other types of in­vest­ment that very di­rectly in­clude in­fla­tion-proof­ing, such as in­fla­tion-linked bonds or ex­po­sure to in­fras­truc­ture projects where con­tracts of­ten in­clude ad­just­ments for in­fla­tion.”

In­fras­truc­ture is an age-old in­fla­tion­bust­ing in­vest­ment but Mr Hol­lands said in­vest­ment trusts in this area were ex­pen­sive at the mo­ment – they are trad­ing at a premium, mean­ing the trust’s value is higher than that of its as­sets. An al­ter­na­tive is to in­vest through in­fras­truc­ture shares; Mr Hol­lands picked Lazard’s Global Listed In­fras­truc­ture Eq­ui­ties fund.

Mark Mel­don, a fi­nan­cial ad­viser at Mel­don & Co, said he ad­vised clients against try­ing to pre­dict eco­nomic trends. In­stead, he rec­om­mended hold­ing a mix­ture of as­sets de­signed to per­form whether the econ­omy is in boom or bust, or whether prices rise or fall. He said in­vestors should look for ex­po­sure to real es­tate, in­dex-linked bonds and com­modi­ties to guard against in­fla­tion.

He said: “I rec­om­mend peo­ple buy ex­po­sure to real es­tate through in­vest­ment trusts such as Pic­ton Prop­erty In­come and F&C Real Es­tate In­vest­ment. I like this ap­proach be­cause with in­vest­ment trusts man­agers don’t have to sell bricks and mor­tar to get cash to pay re­demp­tions.”

Sev­eral of the largest con­ven­tional com­mer­cial prop­erty funds – in­clud­ing those run by M&G, Aviva In­vestors and Stan­dard Life – were forced to block in­vestors from with­draw­ing their cash fol­low­ing the ref­er­en­dum.

‘Cer­tain in­vest­ments di­rectly in­clude in­fla­tion-proof­ing’

A re­turn to 1970s lev­els of in­fla­tion is un­likely. Above, strik­ing min­ers in Wales

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