Wealth managers are more likely to guard against deflation than inflation in the near term as fears about the impact of deleveraging and eurozone woes hold sway, while investors must attune to volatile markets more so than before, panellists argued at yesterday’s Breakfast Briefing event, hosted by the WealthBriefing Network.

Investors must protect wealth in a world of often negative real interest rates; “safe-haven” government bonds are frequently unsafe and geopolitical uncertainties have created skittish markets, delegates heard at the conference, entitled Portfolio Management – Implications And Risks During Uncertain Times. The event was held in association with the World Gold Council and held at the Carlton Club in the St James’s area of London.

“We believe the risk of deflation is currently much higher than inflation,” Marcus Grubb, managing director, investment and global strategist at the WGC, said. Barring a dramatic fresh round of banking bailouts/monetary printing, inflation is unlikely to rear its head in the near term, he said.  

In fact, as a tool of policy, quantitative easing, or money creation by central banks, is losing its effectiveness in boosting GDP, he said.

However, while deflation is more of a short-run concern, those worries “flip over” further ahead, Grubb told the conference.

Volatility

Investors and their advisors live in a world of more volatile markets and this is something they must accept and not become distracted by, Charles MacKinnon, chief investment officer at UK-based Thurleigh Investment Managers, told the conference.

“We focus too much on volatility and it has become a buzzword. Journalists love it,” he said. Instead, however, there is a need to have the “space to focus on what is actually happening in the world”, MacKinnon said. For example, he explained how he and his colleagues look at social media sites and other media outlets for views rather than hold the services of an in-house economist.

In thinking of issues such as inflation or deflation, wealth managers should not forget which currency or currencies a client is exposed to, he said. “What is your currency base? That has to be the question for any client,” he said. “I don’t think you can talk about deflation versus inflation without asking what the currency [in question] is.”

In today’s globalised world of free capital flows, it makes more sense for wealth managers to think about the international sources of inflation – or deflation – for a client, he said.

Experience

David Miller, partner at Cheviot Asset Manager, picked up on a theme he shared with MacKinnon: both men started their financial careers in the early 1980s when double-digit inflation was a grim fact.

“Inflation is hugely important; we haven’t had high inflation for a while and yet even at a low rate it is hugely corrosive of value over time,” he said. And a complicating factor is that each individual client will have his or her own inflation rate depending on spending and other local patterns.

Miller and MacKinnon argued that younger investment professionals haven’t been through such an experience, which may colour expectations of risks.  On the other hand, younger investors have endured years of volatility and haven’t experienced episodes first-hand such as stock market bull runs.  

Alec Letchfield, chief investment officer for UK wealth, HSBC Global Asset Management, said that ideas of how best to diversify assets have changed considerably over the past 20 years, from an approach that focused on just three asset classes (cash, stocks and debt) to many more, as private equity, hedge funds, infrastructure and other sectors have caught attention. However, an investor can spread money among so many different areas “that it can be hard to see what’s going on”, he said.

“We see investment horizons of investors moving into increasingly short levels,” Letchfield said. “Equities are being sold off almost regardless of the costs of doing that,” he said.

Another issue – seen in volatile times – is the lack of discrimination by investors in selling stocks, he added.

Bent out of shape

While eternal verities about diversification hold true, the market valuations are now so bent out of shape by the actions of policymakers such as central banks that old investment ideas have to be rethought, the World Gold Council’s Grubb said.

“It’s very hard to set investment strategy when information from the market is not as it was over the last 30 to 40 years,” Grubb said.

“It is much harder today to get your macro view right,” Grubb said of the economic data now in use, citing the example of government inflation data, as so much depended on the type of goods and services tracked in indices. “Your view of inflation is almost certainly wrong if you look at the published statistics,” he said.

Asked what could “go wrong” in the current environment, MacKinnon gave the example of co-ordinated action by the US and European central banks to prop up the eurozone. “There would be a renewed 'dash for trash'…This will cause an explosive rally in stocks and low-quality stocks,” he said.

Letchfield said a major risk is a disorderly default by eurozone states. Another concern is the state of the Chinese economy, particularly concerning any bubble-like tendencies in its property market. Cheviot’s Miller said a real concern would be if countries imposed capital and trade controls.