KUALA LUMPUR: Emerging market asset-intensive equities, inflation-linkers as well as developed market government bonds are among the more effective hedges against global inflation, said Philip Poole, the London-based global head of macro and investment strategy at HSBC Global Asset Management.
For one, inflation had increased the nominal replacement cost of a company’s assets and this should support valuations of asset intensive companies while increasing pricing power in the cyclical sectors, he said.
“Commodity producers are a clear example of asset-intensive companies,” Poole told reporters at a media briefing yesterday.
“When inflation risks rise, buy low price-to-book value asset-intensive plays and low price-earnings or price-cashflow cyclicals. Russia remains our preferred equity market to play the energy and hard commodity theme.”
According to Poole, asset-intensive businesses include banks and real estate while cyclical sectors include tech, energy, materials and industrials.
In addition, Poole said investors should seek inflation protection through emerging market inflation-linkers as they are the only instruments, specifically designed to protect against inflation.
“Linkers have a number of advantages, “he said. “In contrast to nominal bonds, the market price of inflation-linked bonds respond to changes in real interest rates and provide protection when both nominal interest rates and inflation rise. Because of their different return characteristics, they also provide portfolio diversification for mixed equity and fixed-income portfolios.”
Inflation linkers are financial instruments where the rate of return is linked to the corresponding inflation rate to provide protection from real returns being eroded by inflation.
Poole said the yield on developed market government bonds will need to rise putting aside issues of whether inflation in the developed world will eventually move higher.
“The Fed [the US Federal Reserve] will cease to be a net purchaser of government debt once QE2 (the second Quantitative Easing programme) expires in June,” he said. “While the discussion has now kicked off, there is still no credible US fiscal adjustment package. There is also a key question of how the accumulated portfolios of central bank holdings of government debt will be reduced over time.”
Poole said the market’s base assumption seemed to be that central bank holdings of government debt will simply erode through a process of natural decay as they mature.
“But the reality is that the private sector will need to step up to refinance these maturing bonds,” he said.
Poole said inflation undermines the real value of investments and complicates planning for the future.
For example, he said, those holding cash would likely suffer from currency debasement as a result of inflation.
“Nominal government bonds, nominal corporate bonds and equities are also likely to suffer,” Poole said, adding that bonds with fixed rate returns will normally suffer a fall in their price while equities would also likely fail to provide much insurance.
He said equities generally underperformed bonds in the first 12 months after an inflation shock.
“This is particularly likely to be the case where the inflation shock is cost push rather than demand pull because profit margins would tend to get squeezed,” he said.
All in all, Poole said inflation risks were still mostly concentrated in the emerging market compared with the developed world, as negative output gaps in the latter would likely prevent the inflation shocks from food and fuel prices turning into an inflation process.
“The risks are biased to the upside,” he said. “The market expects inflation to roll over late in the year as based effects kick in. Notwithstanding Malaysia, Singapore and Brunei, some emerging market central banks have not done enough.”
This article appeared in The Edge Financial Daily, May 25, 2011.
Source/转贴/Extract/: www.theedgemalaysia.com
Publish date:25/05/11
For one, inflation had increased the nominal replacement cost of a company’s assets and this should support valuations of asset intensive companies while increasing pricing power in the cyclical sectors, he said.
“Commodity producers are a clear example of asset-intensive companies,” Poole told reporters at a media briefing yesterday.
“When inflation risks rise, buy low price-to-book value asset-intensive plays and low price-earnings or price-cashflow cyclicals. Russia remains our preferred equity market to play the energy and hard commodity theme.”
According to Poole, asset-intensive businesses include banks and real estate while cyclical sectors include tech, energy, materials and industrials.
In addition, Poole said investors should seek inflation protection through emerging market inflation-linkers as they are the only instruments, specifically designed to protect against inflation.
“Linkers have a number of advantages, “he said. “In contrast to nominal bonds, the market price of inflation-linked bonds respond to changes in real interest rates and provide protection when both nominal interest rates and inflation rise. Because of their different return characteristics, they also provide portfolio diversification for mixed equity and fixed-income portfolios.”
Inflation linkers are financial instruments where the rate of return is linked to the corresponding inflation rate to provide protection from real returns being eroded by inflation.
Poole said the yield on developed market government bonds will need to rise putting aside issues of whether inflation in the developed world will eventually move higher.
“The Fed [the US Federal Reserve] will cease to be a net purchaser of government debt once QE2 (the second Quantitative Easing programme) expires in June,” he said. “While the discussion has now kicked off, there is still no credible US fiscal adjustment package. There is also a key question of how the accumulated portfolios of central bank holdings of government debt will be reduced over time.”
Poole said the market’s base assumption seemed to be that central bank holdings of government debt will simply erode through a process of natural decay as they mature.
“But the reality is that the private sector will need to step up to refinance these maturing bonds,” he said.
Poole said inflation undermines the real value of investments and complicates planning for the future.
For example, he said, those holding cash would likely suffer from currency debasement as a result of inflation.
“Nominal government bonds, nominal corporate bonds and equities are also likely to suffer,” Poole said, adding that bonds with fixed rate returns will normally suffer a fall in their price while equities would also likely fail to provide much insurance.
He said equities generally underperformed bonds in the first 12 months after an inflation shock.
“This is particularly likely to be the case where the inflation shock is cost push rather than demand pull because profit margins would tend to get squeezed,” he said.
All in all, Poole said inflation risks were still mostly concentrated in the emerging market compared with the developed world, as negative output gaps in the latter would likely prevent the inflation shocks from food and fuel prices turning into an inflation process.
“The risks are biased to the upside,” he said. “The market expects inflation to roll over late in the year as based effects kick in. Notwithstanding Malaysia, Singapore and Brunei, some emerging market central banks have not done enough.”
This article appeared in The Edge Financial Daily, May 25, 2011.
Source/转贴/Extract/: www.theedgemalaysia.com
Publish date:25/05/11
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