Speaking at a roundtable hosted by the Association of Real Return Investment Advisers, MLC head of portfolio specialists group Brian Parker said he considers traditional safe havens to be “dangerous” given that even a slight increase in inflation is not priced into their current value.
Mr Parker said some of the academic research emerging from the International Monetary Fund and the Federal Reserve Bank of San Francisco suggests inflation rates and interest rates were too low going into the GFC – and that more of a buffer is required.
“Now that makes perfect sense from a policy perspective, but if the end game for the central banks around the world is that they end up tolerating higher inflation than they would have done previously, then markets are simply not priced for that. Bond yields are not priced for that,” said Mr Parker.
He explained that investors purchasing US Treasury bonds or Australian Treasury bonds will be “lucky to earn 70 or 80 basis points” for a decade.
“If inflation rises even a little [they’ll] earn nothing,” he said. “On a three- to five-year basis I could easily go backwards – that doesn’t sound all that safe.”
Mr Parker said the real returns from term deposits are nowhere near as attractive as they were several years ago and that investors could end up being “particularly poor if inflation rises even a little bit from here”.
“I would argue that being an asset allocator today is more challenging than at any time I can remember in the last 20-odd years. It’s because these traditional tools that we have at our disposal are problematic,” he said.
