SEAN HENAGHAN: I’d like to find a cheap inflation hedge. If anyone knows of one, please give me a shout because that’s the challenge, right? KRISTIAN FOK: Around the obvious hedges, people have already priced in inflation – and more. KIRSTINE SODERBERG: What about slightly longer inflation swaps in Australia, how are they priced? I don’t think the curve is that steep, is it? KENT WILKES: On a swap, you’re looking at around the 320 bps mark, marked-to-market daily. There are about eight brokers now so it’s very easy to get pricing and counterparty risk is not a problem. JOHN COOMBE: You might be able to find an AIG that can give you 10-year or 15-year inflation protection, and they’ll guarantee for you. So what about passive approaches to fighting inflation? JOHN COOMBE: Going passive means you’re going to buy negative real rates in the UK and in the US. So you’d only want to buy that because you think that we’re going into deflation. So that’s why passive isn’t logical today if you think inflation’s coming. But if they were trading at real rates, there’s nothing wrong with it. KIRSTINE SODERBERG: The only reason I can think you would go passive is if most of your assets are Australian and you’re primarily exposed to Australian inflation. KRISTIAN FOK: It used to be that you could see through the market’s vitals and get global diversification, and there was a view that there was some synchronisation going on, so if there’s inflation, it’s a global trend. KRISTINE SODERBERG: But that’s no longer the case. I think Australian inflation is the focus.
KENT WILKES: Passive approaches only work on one front, and that is if you live in a nonmark- to-market world, right? So if you want to get inflation protection over 10 years, you can go and buy an inflation-linked bond with a 10-year maturity, and just hold it. But that’s not the world we live in. We’ve been hearing people talk about investors losing patience – they’re moving into term deposits – well, that’s the world we live in. People have shorter timeframes. We think a rolling three-year period is the sort of a timeframe that applies to a retail investor and also for a lot of wholesale investors. They don’t want to be saying, ‘Oh, I’ll get my money back in 10 years’ time.’ They want that inflation protection consistently. And inflation-linked bonds will not give you that on a mark-to-market basis. JOHN COOMBE: The real argument is: in a world where you’re getting, say, 2.5 per cent to 3 per cent on cash over inflation, it’s a completely different world to being in America where you’re getting bigger negative real rates. Now, if I was in America, I wouldn’t want to own any cash securities. I’d want to be totally invested anywhere else than there, right? But in Australia, it is a different argument, and yet – I’m playing devil’s advocate here – we actually haven’t adjusted our asset allocations. We’ve left them where they were in the 1990s and into the 2000s, and if anything, everyone went from a 70/30 split allocation to equities and bonds to 80 to 90 per cent of the risk in portfolios coming just from equity risk. We’re in a different world, and yet we literally haven’t changed our asset allocations.
