Rising inflation is set to be the key worry for the beginning of 2017, as expressed by Britons in a recent Moneywise.co.uk poll.
With this in mind, financial services provider Fidelity is recommending investors “look further afield” for opportunities.
The assessment comes from Eugene Philalithis, portfolio manager of the Fidelity Multi Asset Income fund, who says: “The key issue for income investors in 2017 is how far the reflationary narrative of higher inflation can run… Assets dependent on central bank policy will be vulnerable over the next twelve months.
“Income investors should also be cautious in welcoming the return of inflation from a portfolio perspective. Many favourite income sources of recent years will now face significant volatility, amongst them dividend paying equities.”
What he means by this is that with rising inflation, any money generated from your investments – say, from a dividend - will be worth less than what you’ve been used to it being worth in the last few years. This possible erosion of future wealth has already “seen markets dramatically move to re-price the ‘lower for longer’ narrative, with fixed income, dividend paying equities and REITs selling off,” according to Mr Philalithis.
By “further afield”, Mr Philalithis goes on to define opportunities in Asia and the emerging markets, specifically:
- Asian investment grade bonds – “Asian investment grade bonds offer an attractive yield compared to US and eurozone markets, and the shorter duration of the market makes it is less sensitive to rising interest rates.” (Although we feel that it’s worth pointing out that this excludes Japan, with one of the ’three arrows of ‘Abenomics’’ being quantitative easing (QE).
- Infrastructure and loans – “Infrastructure and loans are also shielded from central bank policy by virtue of the flexibility of their income payments. Infrastructure yields are often linked to inflation while loans are floating rate instruments, meaning their yields rise and fall in line with central bank rates.”
- Emerging market debt (i.e. corporate bonds) – “The yields on local currency Emerging Market Debt yields have not fallen as far from pre-crisis highs, so if we do see some degree of normalisation in developed market yields, this process should be less extreme for emerging markets.”