The spectre of inflation may be looming large globally, but there are ample opportunities for investors to protect the real value of their portfolios if they are willing to look beyond the UK, says Andy Weir, manager of Fidelity’s global inflation-linked bond fund.

Inflationary fears may be well-founded, says Weir, who notes that in the UK, the near term inflation projection was revised substantially upwards, with the Bank of England now seeing a “good chance” that the CPI inflation rate will hit 5 per cent later this year. The UK also faces a very high inflation tail risk and a very small – but still present – risk of stagflation, he says in a note.

Inflation is a global issue at present; it rose to 2.8 per cent in the eurozone in April and emerging markets - particularly China and India – are huge cause for concern. Meanwhile, turning to the US, Weir notes that the authorities’ priorities are making sure the recovery is sustainable and the job market improves – quantitative easing may be ending in June but this may not be the end of all accommodative policies and there may be further liquidity injections to come, says Weir.

Investors may be turning to UK index-linked bonds to mitigate these inflationary pressures, but global markets may actually be the better bet, the fund manager argues. Data from the Investment Management Authority shows inflows to index-linked UK gilts during March and April of £25.85 billion and outflows of £27 billion to traditional UK Gilts, illustrating the concern of inflationary pressures in the UK.

 “Returns are correlated around the world which means that investors can still protect their assets against local inflation pressures whilst going for a global inflation-linked bond fund,” he says. 

Weir further argues that due to the fact that UK regulations have made forced buyers of insurance companies and pension funds, UK inflation-linked bonds tend to be structurally expensive. According to Fidelity’s figures, since the US Treasury began issuing treasury inflation-protected securities (TIPS) in 1997, a sterling-hedged portfolio of global inflation-linked bonds has generated 129 basis points of extra return per annum over UK inflation-linked gilts.

“A global manager also has the ability to target inflation-protected bonds in countries such as Canada and Australia. Due to the heavy commodity-and resources bias of these economies, these bonds are very aligned to commodity price rises so we can protect investors from that source of inflation,” Weir adds.