Low inflation investing

Alwyn van der Merwe, senior portfolio at OMAM, discusses asset classes and how they react in a sustained low inflation environment.

On bonds he doesn’t think that this is the place to be in the transition phase to this low level. He does think that bonds will outperform cash, although cash is always a safe bet.

“In terms of equities, the transition to the low inflation levels has been a painful one. In this environment the equity markets generally under perform. The pain was that equities underperformed bonds, and returned similar numbers to cash.

“In a sustained low inflation environment, there should be higher share prices, as seen in the USA in the 90s.”

“In theory,” says van der Merwe, “equities should outperform in the sustained low inflation environment – there should be superior quality earnings, lower discount rates and a higher rating of shares.”

Van der Merwe predicts that the discount rates will come down over time – interest rates will come down. Structurally there is a case for this downward trend to levels of around 4%, from their current 7%.

In the equity performance scenario he says that there should be 10 to 13% return over time, excluding a market re-rate. “The improvements in productivity for the past 15 years have added to this out-performance.”

On property van der Merwe says all the research cant find empirical evidence that there is a link between inflation rates and property prices.

“What cannot be disputed is that equities will outperform bonds, which will outperform cash, in a low inflation environment.”