At a time when the US is “choosing inflation”, in the memorable phrase of DWS Investments consultant Pippa Malmgren, funds managers are wheeling out new products designed to withstand a higher CPI, or at least emphasising old products they think can do likewise. MICHAEL BAILEY explores some options for investors sitting on vulnerable cash.

Provided they’ve got the product mix to do it, many funds managers are positioning themselves for a global return of inflation, and none in Australia are doing so with more gusto than DWS Investments, the retail asset management arm of Deutsche Bank. “Strikes are back!” exclaimed Dr. Philippa Malmgren, the global financial services policy expert and external advisor to DWS, at the Sydney launch last month of a white paper on investment strategy in an inflationary environment.

Apart from the well-known drivers of future inflation, such as growth of consumption in ‘Chindia’ and overhang from the overtly expansionary monetary policies of 2002-07, Malmgren said that pressure on wages tended to be highest when booms had passed. As evidence she pointed to the “massive gap” between the wage increase demands of Boeing’s 26,000 engineers and machinists and the increase that management was prepared to provide, which started out at 19 per cent plays 4 per cent, and despite moderating since then looked certain to lead to major strikes last month.

Adding to the inflationary pressure were little-publicised Barack Obama policies making it easier to unionise, Malmgren said, at a time when the US Federal Reserve was already actively stimulating inflation by running negative real interest rates (if the ‘core’ inflation figure which includes food and energy is the one used). “Do you really want to hold US Treasuries if the US is choosing inflation?” she asked. DWS investments specialist, Bill Barbour, made it clear the house view was not “hyperinflation…but we do believe there’ll be a sustained period where inflation will run a good 1-2 per cent ahead of central banks’ preferred bands.”

Pointing to the same Morgan Stanley graph pictured here, Barbour said that periods of strong economic growth as the world had just witnessed were often accompanied by higher general prices for goods and services and thus higher prices for commodities. While noting that equities and bonds suffered overall, Barbour added that “periods of high inflation can provide opportunities for some companies to do well…these could include companies with few competitors, sales exposure to high-growth sectors in emerging markets such as infrastructure and consumer goods, those in regulated sectors which will allow revenues to increase in line with inflation, and those with links to real assets such as hard and soft commodities, precious metals, oil and gas, and real estate.”

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