Rising inflation is the biggest near-term challenge we are facing.
That’s according to Dr Pippa Malmgren, Founder of DRPM Group and adviser to governments, who pulled no punches when she set out her view on the world at Monday morning’s first FundForum session in Berlin.
Global debt is a massive problem, and there are only four ways to solve it, she explained.
Option 1 was an Argentine “never going to pay it back approach”; option 2 was the Greek “I’ll pay it back later, but less”; option 3 was UK-style austerity; and option 4, the most likely, was through inflation.
Inflation in developed economies was looming on the horizon, she argued, despite the prevailing view of central banks.
You only had to listen to the conversation at street level, which was dominated by the rising cost of living.
Investors, then, need to carefully reconsider their investing strategies.
So where were the assembled panel – which featured some of the biggest players in active and passive investing – going put their money?
Jim McCaughan, Chief Executive Officer at Principal Global Investors, was quick off the bat to say that he agreed with Pippa – but only in part.
We were in a time of radical change, he agreed, and it was through this lens that investment decisions should be made.
But his lens wasn’t one of rising inflation, but rather one of diversification from traditional investments.
“The majority of the stuff we do now is stuff we didn’t do 10 or 15 years ago,” explained Jim.
“The closed system of liquid large cap is a futile place to be focussing on if you are an asset manager,” he stated, adding that they were gradually deploying funds into other areas, away from what used to be the heartland of the investment management industry.
That included investing in expanded capital markets – private debt, emerging markets, and high yield.
“Multi-asset outcome-orientated investments now dominate the retail and retirement market in the United States,” he said, “and it’s coming to the rest of the world.”
Michael O'Sullivan, CIO, International Wealth Management Division at Credit Suisse, felt that fx was particularly interesting:
“It’s the only asset class where markets are expressing view on politics,” he said, adding that they were long yen against the dollar as a regional safe haven in Asia.
Real estate was also an asset classes they had been active in this year.
Nick Samouilhan, Co-Fund Manager at AIMS Target Income Fund and Senior Multi-asset Fund Manager at Aviva Investors, argued that now was the time to switch yield generation into more growth-orientated income assets.
“What that means for us is a heavy tilt towards emerging market risk, whether equities, fx or debt,” he explained.
"People aged 70 now are as healthy as 50 year olds two decades ago. You will see entitlements change and evolve, and working careers change. That’s the way you get out of the debt."
Frank Engels, Member of the Board of Managing Directors at Union Investment Privatfonds, agreed with Pippa that inflation would rear its ugly head.
They sought protection through alternative risk premium strategies: “very liquid derivative-based strategies that have an absolute return character.”
They also looked to Europe, he added, which was “completely undervalued” relative to other regions.
“Political developments in Europe have seen it fighting back populism,” he explained. “This makes it an investable area again, and it’s valued at attractive levels.”
Eric Wiegand, Director of ETF Strategy EMEA and APAC at Deutsche Asset Management explained that, from the passive side, it was a move away from single bond selection to portfolio selection or market selection.
How will inflation play out?
Tackling Pippa’s opening remarks, Jim disagreed with her analysis of inflation. Whilst he agreed that there was inflation in the developing world, he disagreed that this was the case in the developed world.
There would be social and demographic change that would allow governments to deal with their debt. Retirement, for instance, would become more of a process:
“People aged 70 now are as healthy as 50 year olds two decades ago. You will see entitlements change and evolve, and working careers change,” he said. “That’s the way you get out of the debt.
“I think inflation will be much more subdued. Technology and demographics are great deflationary impacts in the developed world.
“Persistent low interest rates are the central problem for retirement investing looking forward,” he added.
“For the Eurozone, Brexit is a fantastic thing, because on many occasions the UK has been the one arguing against further integration. Now that the UK is no longer part of those discussions, they could forge ahead”
Michael agreed that we weren’t going to have an inflation scare in the developed world.
But what we had to worry about was growing credit risk, citing Italy and China as obvious examples.
But Pippa countered that an inflationary move from 1% to 2.5% would be materially very important to asset managers, and that even a little inflation could create a big outcome.
Switching topics, Pippa wanted to know how, with the Brexit referendum done and dusted, the French President installed and the UK election over, the Eurozone would now play out?
The “untalked about” issue, said Jim, was that the withdrawal of the UK would lead to a more unpredictable Eurozone – because the UK was historically aligned with Germany.
However, it now felt like a softer Brexit, he said, thanks to the recent UK election.
Michael said that the political volatility was – for the moment – confined to the anglosphere.
Whilst the arrival of Macron was positive, he hoped this wouldn’t lead to “a zeal for the unification of everything.” The intermediate step was to finish the building project that is the Euro, he concluded.
Nick felt that it was now a crème brulee Brexit: it would look harder than it was. “Behind the scenes we will carry on like before,” he said.
“For the Eurozone, Brexit is a fantastic thing, because on many occasions the UK has been the one arguing against further integration. Now that the UK is no longer part of those discussions, they could forge ahead,” he argued.
Frank agreed, but warned that the fate of the Eurozone is now being decided in Rome.
“If the Italian election goes wrong, we should fasten our seatbelts,” he cautioned.
But Europe was still a good place to invest, argued Eric, and that wouldn’t change anytime soon.