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Long-term investors warned of forecasting dangers

Long-term investors warned of forecasting dangers

Forecasting can be dangerous if you are seeking to be a long-term investor, a portfolio manager for Morningstar has warned.

Mark Preskett said: "Long-term managers will not give into short-term forecasts.

"Consider the letter sent to former Federal Reserve chief Ben Bernanke at the start of the US's quantitative easing programme. They warned of soaring inflation but the truth is while there has been some pain, the fiscal measures have largely worked."

Mr Preskett made the remarks at FTAdviser's Income for All roadshow at Sandy Park, Exeter, earlier this week to illustrate that while we may feel concerned about things such as inflation, we should not be basing long-term investment decisions on short term extrapolations.

"The latest inflation rates of 2.7 per cent may be concerning but since the Bank of England was mandated in 1998 to set interest rates and maintain inflation first at 2.5 per cent retail price index (RPI) and, since 2003, 2 per cent consumer price index (CPI), the Bank has pretty much kept to its target."

Since 1969 the average inflation rate has been 5.3 per cent.

Since the Bank of England was given its mandate in 1998, the average inflation rate has been 2.02 per cent.

"There will be estimates for where inflation will go", he said, explaining that commodity prices, Brexit and the election of Donald Trump as US president have all been cited as events that will push inflation higher, while the rise of technology, slow global growth and demographic change will have a downward effect on inflation.

Therefore, he said a managed portfolio that seeks to deliver strong returns and a consistent income needs to balance a range of asset classes and geography  to mitigate the effects of wide swings in inflation, regardless of the direction in which it heads.

For example, he said at the moment, given expectations of real, annualised returns - based on dividends, cash flow growth and valuations - Emerging Europe equities look to be a good option for a diversified portfolio.

However, based on the same metrics, the US equity market is the most expensive right now, Mr Preskett added.

simoney.kyriakou@ft.com

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