However, given the steep fall in the value of the pound, and its impact on the cost of imports, this might be about to change.
Earlier this year, Mark Carney, governor of the Bank of England gave warning that the inflation could more than double to 2.7 per cent by 2018.
Although by long-term historic standards, the level remains low, it still presents investors with the additional problem of protecting investments against inflation in today’s low interest environment.
Traditionally, equity investment has been seen as a good counter to inflationary pressure, if that pressure is caused by a strongly growing economy leading to higher profits and willingness by investors to buy riskier companies which will drive share prices higher.
With careful thought and the full use of all the investment levers available to us, we can meet this challenge on behalf of our clients.Other assets may also do well in a high economic growth environment, including property (where values could benefit from rising rents) and corporate bonds (where values benefit from increased demand for risk assets in general).
In contrast, government bonds are a bad investment as both the coupons paid (interest) and the principal (initial sum) to be returned is fixed and thus lose value through inflation.
However, UK economic growth is expected to be sluggish over the next few years – and this requires a different response from investors.
Equity investments will need to be much more carefully selected as a devaluation increases the cost of imports which can impact profit margins, unless these cost increases can be passed on to the end customer.
Without an especially strong economy there will be no rising tide to float all boats and animal spirits are likely to be muted, limiting the demand for less quality companies.
Specifically, companies that can increase prices in line with inflation and protect their profit margins will be sought after and most likely to be able to grow their dividends in line with inflation.
As is the case in most inflationary environments, government bonds are unlikely to be attractive, although it is possible that sub-par economic growth reduces the chance of higher interest rates.
This would be a better situation for bonds than the rising interest rate environment associated with a more traditional economic boom-induced inflation.
Corporate bonds suffer the same disadvantages as government bonds, namely fixed coupons and principal.
Furthermore, credit spreads are unlikely to narrow much if the macroeconomic picture is subdued.
Inflation-linked bonds sound like an obvious solution but these are only attractive if actual inflation is higher than expected inflation and expectations have already risen since Brexit.
Turning to property, the ability of landlords to raise rents in line with inflation in a sub-growth environment is tough as tenants may themselves be struggling to maintain profit margins.
As is the case with equities, those buildings that have the best chance to grow rents in line with inflation will perform the best.
These include buildings that have a unique appeal (i.e. tenants have no choice but to pay more or move out in favour of a new tenant who can) or who have leased to secure tenants on inflation-linked terms.
A great example of this latter category would be GP surgeries. These are typically leased to GPs on long-term inflation-linked leases ultimately backed by the UK government.
Infrastructure plays such as toll roads, hospitals and schools can also provide some inflationary hedge.
Here the UK Government pays private investors to fund concessions which run these assets on long-term leases with payments linked to inflation.
Finally, there is a new breed of multi-asset investment vehicles which has investment objectives to protect the value of an investment at least in line with inflation.
These vehicles often take advantage of a wide range of complex financial instruments to maximise their chances of meeting this objective.
These vehicles should always be carefully researched to ensure they are run by the appropriately experienced team.
Protecting investments from inflation is essential. Over time, the compound impact of inflation can significantly reduce your assets: an annual rate of 1.5 per cent, for instance, will reduce £100,000 to around £75,000 over 20 years.
The peculiarities of our current predicament – expected higher inflation from a devaluation rather than strong economic growth – gives rise to a particular challenge.
However, with careful thought and the full use of all the investment levers available to us, we can meet this challenge on behalf of our clients.
Andrew Summers is head of collectives for Investec Wealth & Investment
