Speaking at the Portfolio Construction Forum Markets Summit in Sydney yesterday, Ms Gosling said policymakers around the world are facing a delicate “balancing act” when it comes to to inflation.
“How do policymakers know what the right amount of [monetary stimulus] is? Too much and we start to see inflation; too little and we start to see deflation,” she said.
What investors are hoping for is a “middle ground” where the global economic recovery becomes sustainable but inflation remains under control, Dr Gosling said.
The only thing investors can be certain of is that there are “a range of potential futures”, including both inflationary, deflationary and stagflationary scenarios – as well as a 'policy-driven bubble', which represents the 'best case' scenario for investors, she said.
The message for investors who are approaching or who are already in retirement is that the downside risk is greater than the upside potential, she added.
The solution to the problem will involve “abandoning the whole concept of an asset allocation benchmark” and focusing on outcomes, Dr Gosling said.
“It means investing flexibly, and keeping as high a return as possible while maintaining a tight control [on the risks],” she said.
In a recent paper entitled Inflation, uncertainty and portfolio management, Dr Gosling stressed that inflation is “something that we need to be concerned about today”.
“This is not because inflation is likely to rise; rather it is that if there is a persistent rise in inflation it will present some significant challenges to the maintenance and ability to grow the real purchasing power of investor’s portfolios,” she said.
“These challenges arise in part because of a presumption factored into market pricing that inflation will remain benign.
"Robust investment processes need to take into account the things that could happen, rather than relying on an ability to predict what will happen,” she said.
