Heyman (pictured), says that it is the most likely outcome of the period of money-printing the economy has been through.
“Interestingly, I saw an article the other day which said the inflation rate had actually gone down. I don’t believe that is permanent – it is really a matter of when, not if,” she said. “The new governor of the Bank of England – Mark Carney – has shown no fear and has set his stall out about inflation. Our feeling is that there has to be inflation, as the economy has been slow for so long.”
“Really, it all depends as to how well controlled it is as a sensible degree of inflation can be positive. It erodes debt and higher inflation can lead to higher wages which in turn could lead to greater confidence,” she added.
With this in mind, Heyman tells FE Trustnet what impact inflation would have on the major asset classes – equities, fixed income, property, gold and cash.
Cash
Heyman says investors who are holding a large proportion of cash would be in real danger.“Inflation will have a significant impact on cash deposits,” she said.
“Investors do need to hold cash so that they can have funds for particular circumstances. Though inflation would have a big impact.”
“Cash shouldn’t be a long-term asset class. This is especially the case as the rate of interest from cash deposits is significantly below inflation.”
Equities
Heyman says that equity investors should benefit from a higher degree of inflation; however she says stocks could struggle if interest rates were to be hiked up.“Though equities are by no means inflation-proof, you would expect that they would perform well if inflation were to rise. However, that is providing that interest rates remain low and are not increased,” she said.
“If we see inflationary pressures coming through, central banks will have to step in and increase interest rates which would be bad news for equities. However, we expect the asset class to perform for a while longer.”
“Investors can get good potential for both growth and income, via dividends,” she added.
Bonds
Investors have certainly heard talk about the risks involved in the fixed income market and Heyman says that a higher inflationary environment would put further strain on traditional bond investors.“With fixed income, inflation is a key issue. At the moment investors are seeing very low yields from fixed income,” she said.
“Both corporate credit and gilts are trading above their par value and investors potentially face capital losses by the time those bonds reach redemption.”
“Though private investors may not hold direct bonds, inflation will have an impact on collective funds. If they are buying gilts or corporate bonds they can expect that they will not see the same amount they invested at redemption.”
“Yields around high quality debt are all below inflation so there are real risks surrounding the asset class. If an investor bought bonds a long time ago they could hold till redemption, or they could take gains now and wait for a correction till they re-invest,” she added.
Gold
Heyman says that though gold can be seen as a hedge against inflation she urges investors to take the risks within the asset class into account before buying a gold exchange traded fund (ETF).“Gold is more like a currency and is linked to the US dollar,” she said.
“People say it is a hedge against inflation, but you are just getting capital appreciation, you aren’t getting any income. Gold is still overpriced in our opinion, because if you look at a chart of the gold price there has been extortionate growth over recent years.”
“Its high performance came on the back of investor nervousness and though it has corrected, it will have to correct further.”
Our data shows that the gold price has returned 303.25 per cent over the last 10 years, while – as a point of reference – the FTSE All Share has returned 158.50 per cent.
Performance of indices over 10yrs
Source: FE Analytics
However, as the graph shows the majority of gold investors’ returns have come since the financial crash of 2008. The graph also highlights the large sell off in the precious metal earlier this year.
“The gold price is still high and though it may be a hedge against future inflation, investors who are buying it now must accept the potential fall in capital value and that they will receive no income,” Heyman added.
Property
Property, especially physical assets, is often seen as an insulator against inflation, but Heyman warns investors should not consider the asset class as a whole to protect against inflation.“It depends on what type of property you are invested in,” Heyman said.
“If it is an infrastructure style bricks and mortar funds that invest in buildings like hospitals, they should give you a degree of inflation protection. This is typically because they have inflation linked leases.”
“There is an issue with commercial high street property, as we are seeing shops closing which means leasing units are empty. However, a high quality forward looking funds will look to hold warehouses as companies begin to focus on internet trading.”
“If inflation doesn’t have too much of an impact on the consumer, they will continue to buy online,” she added.