UK faces both inflation and deflation fears, says Pimco
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The UK faces “substantial” threats of both deflation and inflation, according to Pimco, the world’s biggest bond investor.
In an investor note this week, Pimco portfolio manager Mihir Worah warned that “tactical” bond investment was necessary when dealing in the US or the UK depending on long-term growth and inflation dynamics.
He says: “The inflation outlook for the UK is perhaps the most bifurcated among developed nations, with substantial risk of both inflation and deflation.
“The UK is a smaller and open economy, and prices there react very strongly to what the currency is doing. Sterling has depreciated versus a basket of global currencies over the last couple of years, leading to higher inflation.
“On the flip side, the UK suffers from some of the same issues plaguing the US and continental Europe, including a crisis in the financial economy, the bursting of a real estate bubble, and an over extended consumer, all of which could damp inflation.”
Worah says he is avoiding any inflation-linked bonds issued by countries such as Greece that have a very severe budgetary shortfall coupled with the inability to generate meaningful inflation since they do not control their own currency and have limited control over their monetary policy.
He says: “On the other hand, we are investing in inflation-linked debt of countries such as Australia that have healthy balance sheets, offer high real rates of return and the possibility of higher than expected inflation in the near future.”
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