November 12, 2010 5:59 pm

Inflation sparks rush to safety

Wealth managers are rushing to protect their clients’ portfolios amid growing fears about rising inflation.

Investors are being advised to buy equities, property and gold to guard against rising prices after the Bank of England raised its forecast this week. The consumer price index (CPI) is now set to rise to 3.5 per cent by the end of the year.

“Inflation has been a concern for a while but this week’s report has reaffirmed this,” said Peter Fernandes, head of private clients at Smith & Williamson. “Our investment managers are now looking very closely at ways to protect people’s portfolios.”

The prospect of higher inflation comes as new research reveals heightened concerns about an economic slump. Inflation was cited as the top concern for wealthier, more affluent investors in a recent survey by market researchers Dianomi. It was the second-greatest concern overall among the 1,650 investors polled, with recession in first place and higher taxes third.

Investors are also moving out of cash and fixed-rate savings bonds, which are expected to perform poorly in an inflationary environment, according to the Dianomi poll.

“Clients are increasingly asking us how they might protect themselves against inflation,” said Tracey Maeter, head of investments at RBC Wealth Management. She is recommending that clients buy equities as the best hedge against rising inflation – favouring stocks in emerging markets, as well as value and income shares.

Despite its volatility and high price, gold is also being used by some wealth managers as a hedge against inflation risk. Rothschild Private Banking & Trust is bulking up on its “already sizeable” gold positions.

The private bank also likes commercial property as an inflation hedge. “Weak economies are depressing rental growth, but exceptionally low bond yields may spur more interest in property,” said Dirk Wiedmann, head of investments with Rothschild.

However, Bestinvest is also preparing its investors for deflation, given the level of economic uncertainty, by buying short-dated gilts and investment bonds.

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