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Investors urged to prepare for inflation
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| Robert Brown |
Watson Wyatt has issued a warning to Australian institutional investors that they should be preparing now for the return of inflation, notwithstanding the fact that accurately timing protection strategies will prove difficult.
The chairman of Watson Wyatt’s global investment committee, Robert Brown, said while the company found it difficult to project an imminent return to high and persistent inflation, it was sceptical that central banks could smoothly manage an exit from monetary policy and would therefore struggle to control the inflationary pressures that emerged.
He said the firm also held concerns with respect to material downside risks to inflation in the near term in the event of another significant political or economic crisis capable of causing a reduction in economic activity and perpetuating deflationary pressure.
“Clearly, another crisis could emerge at any time and the current state of the global economy means a near-term shock would be particularly deflationary,” Brown said.
He said while Watson Wyatt believed policymakers had shown the ability and willingness to do whatever it took to avoid the pain of an entrenched debt-inflation spiral and did not view persistent deflation as a likely outcome, lingering inflation rates close to zero were possible, especially in the US.
Brown said Watson Wyatt’s central view was that relatively high inflation of between 3 per cent and 4 per cent a year would return after three or more years.
“While this appears a distant prospect, investors should be assessing its potential impact and planning timely protection strategies, particularly those institutional funds with large inflation-linked liabilities,” he said.
AUTHOR
Mike Taylor
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