Peter Elston of Aberdeen Asset Management reveals his outlook for inflation and what this means for investors.
Date: Sept 2011
Tags: Inflation, Equities, Fixed income
The outlook for inflation really depends on which part of the world one is looking at, said Peter Elston in an interview.
In Asia, for example, economies have been growing strongly, leading to rising inflation and therefore a problem for central banks across the region in terms of the need to tighten monetary policies over the last 18 months or so, he explained.
The developed world, meanwhile, is experiencing a deflationary environment, driven by the private sector, deleveraging households wanting to strengthen their balance sheets, said Elston. To counter that, central banks have been stimulating their economies by essentially driving up the money supply – which is actually a technical definition of inflation, but that hasn’t yet translated into inflation of consumer goods prices.
Outlook for Asia
In the short to medium term, Elston said he expects to see a bit of a pause in terms of rising consumer goods prices in Asia, given that the economic weakness in many countries is taking some of the pressures off commodity prices.
That should at some point feed through into lower inflation in terms of consumer prices, he explained.
The recent fall in China’s headline inflation rate, for instance, could well continue for the next few months, he said.
Weighing up the impact of inflation
Since many Asian countries are essentially emerging markets, which means they have high growth, inflation is a natural thing to see – either through local prices rising or through exchange-rate appreciation – simply reflecting the fact that purchasing power in these countries is on the rise.
Either way, with the prices of goods goes up in US dollar terms, a lot of Asian central banks have been trying to stop their exchange rates from appreciating, he said. Yet that means they get inflation coming through the prices of local goods going up very quickly.
As a result, Elston said inflation shouldn’t be something to worry about in Asia as much as it is in the developed world, where there are much lower levels of growth, so inflation can be much more damaging.
Opportunities for investors
According to Elston, a way to think about inflation is that it’s good for real assets, for example equities, rather than nominal assets like fixed income.
Increasing prices means profits are essentially going up in line with inflation, he explained, so over a period of three to five years, for example, inflation should be good for equities.
On the flipside, bonds will tend to go down as inflation goes up, said Elston.
Mis-understanding inflation
Given that inflation technically refers to the inflation of the money supply, central banks in developed countries are in fact inflating their money supply to try to boost their economic activity, said Elston.
The fear is, he added, that this inflation in the money supply is going to result in high inflation of consumer goods prices.
Yet without economic growth happening at the same time, this is stagflation, explained Elston – where there is stagnant growth but high inflation, which he said is a big worry for developed markets.
This is also a reason why the gold price has shot up, he said, to reflect the fact that the central banks in the West are debasing their currencies.
