Fixed-income investment company Ardea Investment Management has warned investors not to be complacent about inflation, despite the current “benign inflationary environment”.
Using the volatility that followed the March quarter’s “surprise inflation result” to emphasise his point, Ardea principal Tamar Hamlyn said investors need to be wary of “the powerful impact of unexpected inflation outcomes on volatility”.
“Any complacency could be dangerous, given that even a modest uptick in price pressures would have a large impact on interest rate-sensitive assets,” he said.
Investors either within, or catering to those within the retirement phase, were most at risk of this kind of “inflation shock”, according to Mr Hamlyn, since they can’t accrue compounding benefits while withdrawing capital.
“For investors managing drawdowns in capital to fund retirement living standards and maintain spending power, it is particularly important to recognise and manage inflation risk volatility,” he said.
Mr Hamlyn said “anticipation and smart positioning are essential” to avoid the negative consequences of “sharp, unexpected inflation outcomes”.
“Unexpected inflation shocks can occur and can have a considerable short-term impact on many asset classes, as well as bringing forward the impact of long-term compounding declines in the purchasing power of fixed-income streams,” he said.
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