Inflation Thematic 25th September 2009

Are we entering into an inflationary period? If we are, what will be different this time and how can we attempt to benefit from an investment standpoint? These are the core questions of this Alternative Investments Thematic.

In this report we begin by offering a definition of inflation and emphasising the importance of inflationary considerations by investors when managing their portfolios. We then present evidence that we may be entering into an inflationary period. Please note that this report is being published on the heels of official inflation figures out of the U.S. which ‘confirm’ ultra-low inflation. Definitions and assumptions on what constitutes an inflationary period are then provided. We subsequently plot how several asset classes, indices & economic measures have fared during those assumed periods of inflation (both in the US & UK) providing observations regarding the predictive power of these commonly accepted indicators.

At the end of this paper we conclude that, whilst many indicators support the case of impending inflation, investors need to remain cautious about assuming that inflation will affect the same asset classes, in the same ways, as in the past. As such, investors who believe inflation is imminent and wish to ‘hedge’ or better yet ‘profit’ from that eventuality need to ask themselves the challenging question, ‘what will be different this time’? Within the conclusion, this thematic expresses our views on which investment strategies may profit and which may under-perform going forward.

Finally of note, in appendix III, we briefly examine the evidence against the case for impending inflation, such as lack of wage pressures.