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Should we all be worried about inflation?

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Summary

We think investors should stay focused on inflation as part of their wealth strategy

2 min read

A big week for inflation

Inflation has long been an issue for the wealthy, eroding the value of cash year after year. But it’s also influential in how central bank’s determine their interest rate policy which is why bond markets were surprised by last week’s inflation numbers on both sides of the Atlantic. In the US, inflation rose more sharply than anticipated and in the UK it failed to fall as many had expected. The announcements didn’t slow the recovery in equity markets following the recent sell-off.

US inflation, as measured by the Consumer Price Index, grew by 0.5% compared to the forecast 0.3%. This resulted in annual inflation of 2.1%. Meanwhile, UK inflation stayed at 3% defying expectations it would start to fall.

These latest numbers, alongside recent commentary from central bankers on both sides of the Atlantic, have further raised expectations of interest rate rises from the US Federal Reserve and the Bank of England.

For wealthy individuals it’s important to think carefully about how you preserve the spending power of your wealth for the future, or even the next generation. Historically, equities have been the only major asset class to outpace inflation but investing in a way that suits your risk profile should always take priority. The last few weeks have been a reminder of the need to invest wisely, in a diversified portfolio or fund, to cushion the volatility inherent with equity investing.

At Coutts, as part of our diversified approach to investing – it’s one of our core principles –
we favour corporate bonds and emerging market local currency debt over government bonds as they are less vulnerable to rate rises. This is alongside our equity themes which include Europe, Japan and sectors such as technology and healthcare.

“For wealthy individuals it’s important to think carefully about how you preserve the spending power of your wealth for the future, or even the next generation”

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Markets rising but volatility lingers

Markets are gradually climbing back from the recent stock sell-off. US equities had achieved five straight days of gains and looked on course for a sixth at the time of writing, while London’s FTSE 100, Europe’s Stoxx 600 and Tokyo’s Topix indices were all up on Friday.

However, we believe that some degree of volatility will remain for the time being.

The VIX index, which measures investor expectations for volatility in the S&P 500, is still relatively high indicating that markets are not out of the woods yet. Known as the “fear index”, it is currently hovering at around 18 having spent most of January in the low double and single digits.

Despite this, we at Coutts believe the current, positive global economy and corporate environment will continue to support equities over the medium term.

The underlying macro environment remains one of synchronised global growth. We have just seen a very encouraging set of corporate financial results in the US and there are no signs of a US recession this year that would mark a deeper downturn. The Bank of England recently raised its growth estimate for the UK, the European Union expanded at its fastest pace in a decade last year and Japan has just recorded its eight consecutive quarter of growth.

So while we might expect some more short-term noise, we believe the longer-term economic fundamentals remain solid for investors.
 

Time’s running out to make the most of your ISA allowance

Current market volatility reinforces our view that sound investing is not about trying to find the right time amid the highs and lows of markets to get started. It is about focusing on long-term financial planning.

With this in mind, it’s worth remembering that, with the tax year coming to an end soon, now is a good time to make sure you have made the most of your £20,000 annual ISA allowance. Putting your investments into an ISA means you won’t pay income tax or capital gains tax on your gains.

And as an added incentive, Coutts clients who invest £20,000 or more through Coutts Invest by 5 April – whether they invest through an ISA or directly – will receive a Thank You from Coutts reward. They will be able to choose from a selected range of products and experiences including a gift card for Mr and Mrs Smith hotels, a Fortnum & Mason hamper or a Bang & Olufsen speaker.

Click here to find out more.


Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

You can only have one ISA with one provider in any tax year.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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