Speaking at a recent roundtable event hosted by InvestorDaily's sister title, ifa, MLC CIO Jonathan Armitage said inflation risk should take a more prominent position in the strategic thinking of financial services professionals.
While “on the face of it there aren’t very many inflationary pressures … in the developed economies”, historically ultra-low interest rate environments – as seen currently in a number of jurisdictions – have been followed by a resurgence of inflation, Mr Armitage explained.
“This is something people need to be wary of,” he said. “We have a generation of investors who are used to inflation being pretty benign, but if you go back and talk to investors in the 70s and 80s, they will tell you the real impact on returns and real impact on purchasing power is pretty significant.
“We need to make sure we have educated our clients and also that we have the products and options our clients need as part of their investment portfolio.”
Describing inflation as “the silent tax”, Mr Armitage said average yield-seeking clients that have “vanilla” allocations in fixed income, defensive equities and REITs face particular “duration risks” to their portfolios – indicating the need for a “health warning” from financial advisers.
Addressing the same roundtable discussion, van Eyk head of asset consulting Jonathan Ramsay said misunderstandings about inflation risk are prevalent among financial services professionals.
“What’s really interesting is that the deflationary scenarios, looking forward, are the ones that hurt you less,” Mr Ramsay said.
“Inflation is still probably a low-probability scenario, but it’s the one that contains the most risk because it’s not the one people are expecting, and it’s the one that will hit assets, especially fixed income, which it will hit the hardest.”
Offering a client-facing view on the discussion, Tim Mackay, principal of boutique planning firm Quantum Financial, said clients are concerned about inflation risk, though they “don’t call it that”.
“Especially for our older clients, their key concerns are their health, their family and third is actually inflation,” he said.
“They don’t call it inflation, but they’re worried they’re not going to be able to pay for the things they need and, funnily enough, health is a major driver of inflation.”
