Investors need to prepare for high inflation

The monetary policies being pursued by major Governments could trigger high inflation in many economies in the immediate future.

That's according to Nikko Asset Management chief investment officer - international, Yu-Ming Wang, who said that the inflation-targeting policy being pursued by the US Federal Reserve and the Bank of Japan are strong indications that higher inflation expectations are in the early stages of taking hold.

According to Wang, inflation-targeting means quantitative easing can stay open-ended in terms of quantity and duration, as long as inflation stays below target.

While QE has largely succeeded in its purpose of stabilising confidence and preventing a downward deflationary spiral, Wang said that the money being injected into the global economy has been sitting idle in the form of cash held by corporations or financial institutions.

"Loan demand has dwindled and currently companies have little incentive to invest," he said.

"In this type of environment, inflation does not have much chance of taking a firm hold."

Wang said investors will need to turn to strategies that have not been required in recent years.

"Classic inflation hedging strategies used to focus on gold, commodities and equity investing, but we believe that following this mindset in asset allocation strategies is outdated," he said.

In addition to credit and short-duration strategies, inflation-linked and floating bonds, and convertible bonds, Wang said equities could provide a decent hedge against inflation threats over the long-term.

"By taking a longer-term view, evaluating the risks and rewards of individual sectors and with careful consideration of fundamentals, investors with a multi-asset-class inflation-hedged portfolio will very likely benefit from higher inflation expectations," he said.




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