Armstrong Investment Managers warn of the ravages of future
Armstrong Investment Managers (AIM) warn of the ravages of future inflation, the risks of Government bonds and provide investors with ideas on how to hedge these risks.
Brazil’s finance minister Guido Mantega has said an international currency war is underway.
Patrick Armstrong, Managing Partner, says, “We view Mantega’s comments as a clear warning of what to expect in the coming years. More and more countries are taking steps to spur growth by weakening their currencies. The US Federal Reserve is signalling it may revive large-scale asset purchases next month and the central banks of Japan, Switzerland, Brazil and Korea have all intervened to weaken their currencies.
Politicians are completely incentivised to create inflation and destroy the purchasing power of their currencies because the alternatives of paying down debt through large tax increases and massive spending cuts will surely see them lose public favour.”
AIM believe investors need to position their portfolios NOW to protect themselves from the ravages this currency war will have on their real net worth and future purchasing power. Low yielding Government bonds which are yielding less than inflation should not be viewed as a safe haven in this type of environment. Cautious investors should look elsewhere to preserve the purchasing power of their investment portfolio.
Dr. Ana Armstrong, Managing Partner, says, “10-year yields on bonds from the US and Germany are below 2.4% and the UK is currently at 2.8%. UK consumer prices are 3.1% higher than a year ago and the retail price index, which includes housing, is up 4.6% during that period.
Bond investors need a massive fall in future inflation to receive a positive real return on Government bonds. Yet surprisingly the bond market only seems worried about deflationary forces driven by weak economic growth and high unemployment. We expect that the current deflationary forces will be more than offset by the political
forces that advocate the printing of money, further quantitative easing and large budget deficits.”
All of the Distinction funds which AIM manage have the objective to significantly beat inflation. AIM believe the most effective and efficient way to preserve and grow the purchasing value of a portfolio is a multi-asset real return approach. Due to shortterm deflationary pressures the market is currently offering many great investment
opportunities to hedge future inflation risk.
1. High Yielding Utilities and Infrastructure
Utilities and Global Water equities are currently yielding almost 5%. We expect the Global Water industry will have many years of above-average growth based on increased demand from mass urbanisation of emerging markets and decades of underinvestment worldwide. Many utilities also have a regulated asset base and their revenues are linked directly to inflation. The current high yield with a strong potential to increase dividends with inflation make these types of equities very attractive inflation hedges.
2. Dividend Futures
Over the long term, equity earnings and dividends tend to grow at a rate roughly equal to economic growth plus inflation. Due to technical factors implied dividends on the Euro Stoxx 50 are showing negative dividend growth for the next five years. Bottom up consensus estimates for these dividends show 8% growth per annum. We believe dividends offer a cheap hedge on future inflation.
3. Long Asian Currencies vs. West
Asian countries are running huge fiscal and current account surpluses. They also have much lower unemployment and higher economic growth. We expect a continued broad appreciation of Asian currencies vs. the major Western
currencies (USD, EUR, GBP).
4. Commodity-backed economies with higher growth and lower deficits
The Brazilian and Canadian equity markets benefit from economies which are backed by a wide range of commodities, lower unemployment and better economic growth, plus their respective governments did not need to bail out their banks in the crisis.
5. Precious Metals and Commodities
As central banks destroy the purchasing power of their currencies we expect continued upward pressure on a range of commodities. We expect Gold, Silver and Platinum will continue to benefit as alternatives to fiat currencies, while
agricultural commodities have the potential to spike higher based on low inventories and rapidly increasing demand.
6. Long Short Duration High Yield Bonds and short Long Duration Government Bonds
Short-dated high yield corporate bonds offer a yield greater than inflation and are yielding 4% more than government bonds. By focusing on shorter dated maturities investors can lower the capital at risk from rising spreads or rising interest rates.
Armstrong Investment Managers LLP (AIM) is a specialist and independent investment manager focused on delivering market-leading inflation-beating investment solutions. AIM manage the £184 million range of Distinction funds.
IM Distinction Diversified Real Return fund (DRR) is Distinction’s balanced multi-asset investment solution for cautious investors. The broad opportunity set and dynamic flexibility of this fund creates the potential for much better risk adjusted returns than traditional investments. The fund is diversified across a range of Global investment themes as well as a diverse range of regions, asset classes and investment strategies. DRR targets a return in excess of inflation (UK RPI) +4% per annum over a seven-year market cycle.
DRR was launched on 19 January 2010 and is up 12.8% to 11/10/2010, placing it first in the IMA Cautious Managed Sector over that period.