Global inflation puts advisers on alert

Index-linked securities are one way of hedging against inflation, but as Adrian Hull, senior fixed income product specialist at Kames Capital told FTAdviser, while this can help with inflation proofing, there are, like short-duration bonds, downsides.

He explains: "Neither asset class is cheap as investors have already future proofed portfolios for such outcomes.

"Despite this rational response it is likely that headline UK RPI will push higher than the whole of the nominal gilt yield curve in 2017 – repeating valuations of 2011.

"Therefore, index-linked securities are likely to be better performers if inflation is higher than the current consensus of RPI at around 2.75 per cent in 2017."

Equities 

1) Domestic

UK equities could be a way for investors to diversify away from low-growth assets such as cash and bonds and achieve potentially higher-than-inflation returns - but of course there is higher commensurate risk involved.

The FTSE 100 index rose 28.03 per cent year on year; an index-tracking fund would have far outstripped inflation over the same period. 

That said, political uncertainty over the nature of Brexit - hard, soft, middling - as well as any effects from the policies implemented by our special relationship partner the US - could see further volatility on the downside.

Regardless, it's hard to envisage inflation ticking up to high double-digits, although history of economics suggests nothing is impossible.

For now, inflation even at a 2.7 or 2.8 per cent peak, will still be at a much lower level than it was in 2011-2012 (see Figure 2: UK inflation. Source: Bloomberg/FT).

2) Europe

Dylan Ball, executive vice president, Templeton Global Equity Group, is anticipating 2 per cent inflation in the eurozone, but believes this might be useful to help European equities.

He believes the prospect of higher inflation across the eurozone could be the catalyst that helps close the earnings gap.

Mr Bell says: "After a year in which political surprises dominated headlines across the globe, we believe conditions are lining up for a positive year for European equities—and not before time.

"As value investors, we try to stay focused on a longer-term investment horizon and use volatility as an opportunity to look for undervalued companies.

"More important for the asset class in 2017, we believe, is the prospect of higher inflation, which now seems likely to be coming down the pike. Inflation, in our view, should be positive for European earnings."

He explains that, traditionally, inflation has tended to lag movements in energy and commodity prices by approximately three to four months.

By September last year, the price of oil had recovered from its historic lows, moving back up to around US$50 a barrel.