View more on these topics

Point of error

Central banks may be about to make a massive mistake by not tackling inflation early enough

With February data confirming that the global economic recovery is largely back on track, we raised our scores across the board for recovery or the inflationary growth scenario. But this is still very much an industrial-led recovery as domestic consumption data remains lacklustre, even in economies such as Germany where growth is practically booming.

Despite disappointing news on the inflation front, it appears the equity market does not completely believe in the inflationary threat. Even after the recent sell-off, bonds are only discounting an inflation rate in the US of just about 2.4 per cent.

Our worry is that the majority of governments are looking through all the exceptional factors – such as food and oil prices – and discounting them as an exogenous problem that their own policy response cannot deal with.

As world monetary policy continues to effectively accommodate the significant inflationary pressures, there is a risk that we could be at a critical point where central bankers are about to commit a major policy error.

The UK is a prime example of a central bank not doing enough to tackle inflation. There is a growing fear that the Bank of England is risking a major loss in confidence over its continued failure to meet its inflation target.

If the Government’s spending cuts do not deliver a strong enough deflationary drag later this year, the Bank of England could be forced to tighten policy aggressively.

Coupled with worries about rising inflationary pressure, we are now seeing events in the Middle East which have served to push oil prices up to around $115 per barrel. If stresses continue to build and oil prices rise through $120 per barrel, we could see a very material impact on con-sumer spending in the West and a relapse into recession.

Exploring the most appropriate way to diversify and manage assets during this volatile time, Barings has upgraded government bonds and index-linked bonds to neutral following a meaningful rise in yields on conventionals to 3.4 per cent whiles US Tips hit 1.4 per cent at the end of February, before rallying to 1.1 per cent.

Equities still look fair value, although they are reliant on continued earnings.

Another important change to our multi-asset portfolios has been the downgrade of gold to neutral.

In our view, one of the attractions of gold for big investors like pension funds and sovereign wealth funds is that it has generally been uncorrelated to riskier financial assets such as equities. In 2008, when the equity market bottomed out, gold returned 4 per cent compared with a fall of 30 per cent in UK equities and a 40 per cent decline in global equities over the same period.

We invested our multi-asset portfolios in gold at the right time and benefited both from the rising price and the diversification value it offered.

But since 2010, gold has started to lose its shine as a risk diversifier and has begun to correlate with risk assets, such as equities. Rising inflation has brought forward the spectre of higher interest rates posing a further threat. So, as gold begins to lose its glimmer, we believe there is an opportunity to shift to other assets with better risk reduction qualities, such as inflation-linked bonds, agriculture, property and even cash.

Percival Stanion is head of asset allocation at Baring Asset Management



Northern Rock returns to securitisation market

State-backed bank Northern Rock plc is planning to enter the securitisation markets for the first time since receiving a Government bailout. The bond issue will be from the “good” bank, Northern Rock plc. The lender was split in two in January 2010. The lender says it is looking to securitise around 2 per cent of […]


MM leader: FSA needs to rein in its costs

While it is pleasing to see the FSA business plan confirm a cut in fees for many smaller firms, the relentless overall increase in regulatory budgets is of major concern. When Lord Turner joined the FSA in 2008, he declared small IFAs had been paying too much for too long, yet there has been little […]

Bank rate at 0.5% reaches two-year mark

The Bank of England bank rate has been held at 0.5 per cent for the 24th month in a row and quantitative easing stays at £200bn. The last rate change was on March 5, 2009, when it was reduced from 1 per cent to 0.5 per cent. On the same day, the Bank of England […]

MM leader: Hutton builds framework for fair pensions

Lord Hutton has provided the Government with a fair and sustainable set of proposals for public sector pension reform. In last week’s final report, the former Labour cabinet minister grasped the nettle that the previous Government was too fearful of handling. His proposals for a move to career average schemes, linking most public sector pension […]

9 October thumbnail

Johnson Fleming set to host webinar on auditing auto-enrolment schemes

With 23 auto-enrolment compliance notices issued by the Pensions Regulator, and an evolving legislative landscape meaning previously compliant schemes may now be in breach of regulation, now is the time to think about auditing your auto-enrolment scheme. Johnson Fleming is hosting a webinar on 9 October at 11:00 on how to audit your scheme to ensure compliance, avoid breaches and fines and overcome data issues.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm