British asset allocators are turning more positive on commodities and high yield than equities as inflation rises, according to a January survey by Money Marketing’s sister title Fund Strategy.
The outlook represents a slight change from allocators’ December outlooks for 2010, when managers were equ- ally positive on equities and commodities.
Recent commodity price rises and inflation have made investors more cautious on prospects for companies and stocks as well as government debt as returns are partic- ularly sensitive to inflation.
Inflation can leave companies with increased costs, which they may not be able to pass on to consumers.
If interest rates rise to calm inflation, companies’ financing costs may also be affected.
Outlooks for the month from 25 fund managers revealed that two were positive on global equities, one was positive on developed world equities, two on emerging market equities, two on UK equities, one on American equities and one on Chinese equities.
By comparison, commodities or commodity-related equities performed strongly. Six asset allocators were pos- itive on commodities, three on oil and two on precious metals.
In fixed income, five managers were positive on credit, three on emerging market debt and five on high yield.
High yield in particular has a higher return adjusted for inflation and is therefore less sensitive to rises in inflation and interest rates.
Managers were also sligh- tly positive on other income-producing assets which can adjust their payouts in line with inflation.
These included high-yielding equities, infrastructure, commercial property and select areas of the Asian real estate market.
But higher inflation made managers concerned over Asian equity markets, where two managers expressed negative views on China and two negative on India, with two cautious on China or emerging Asia overall.
Emerging Asian economies have been experiencing high levels of inflation and are lik- ely to tighten monetary policy further to contain it.
Managers are also still broadly cautious on Europe. Some Northern European countries are continuing to see impressive growth while the outlook for the highly ind- ebted eurozone periphery remains uncertain.
Hargreaves Lansdown investment manager Ben Yearsley says: “I think rising inflation will feed into the equity market. As an asset class, it will rise a bit later than commodities but I do not believe equities will suffer.”