Until very recently inflation has been a primary concern for investors, both to the real buying power of their income and the real value of their investments. Unfortunately, official government statistics on inflation, until recently, bore little resemblance to the real level of inflation being experienced by individual investors as their patterns of expenditure meant that their own inflation figures were often double or treble that of the Retail Price Index. In that scenario, we had to construct portfolios of investments that would maintain the real buying power of client’s investments, as well as preserving the real value of their assets.
With inflation now at historically low levels, one might be forgiven for thinking that the problem has disappeared. Unfortunately, low inflation has meant that individuals have had to seek out income in other places rather than the traditional homes for savers, typically bank and building society deposits because rates have been miserly. For the general public this has often meant taking unwarranted risks in superficially attractive high yielding investments. We have as a result, conducted a great deal of research into funds to enable us to either construct or reposition investment portfolios to ensure that they do not have an inappropriate level of risk for clients.
So what of the future?
Due to low commodity prices, particularly oil and other natural resources, coupled with very competitive retail prices, both in store and online, inflation has remained low. However, the risks are that the Chinese economy and the world economy in general, begin to accelerate out of a period of stagnation and inflation starts to pick up again.
Inflation is insidious and quite difficult to control once it starts to occur. Many countries are now actively trying to promote some degree of inflation to prevent the type of deflationary, low growth scenario that Japan has experienced since the 1990’s.
For this reason, our aim is to ensure that our clients are invested in the types of companies that can grow their dividends comfortably and ahead of the rate of inflation as this will ultimately protect their real incomes. Should inflation not return, those increasing dividends will be even more valuable, as will the increased capital values, as those companies share prices begin to reflect the quality of their management.