Inflation challenge coming

Inflation is the main risk that investors and funds managers will need to manage in the next 20 years, according to Pippa Malmgren, principal of consulting firm, Canonbury Group.

Malmgren who provides research and advice to global investment firms and governments on the interaction and impact between markets and policy, said inflation puts pressure on company profits which is detrimental for investors.

She said food prices are increasing globally, the price of rubber increased 150 per cent in one year, and the price of iron ore has faced a dramatic increase.

“Inflation deteriorates quality, for example when iron ore prices are up so much, builders say they will use less steel in buildings,” she said. “Inflation puts pressure on margins and that is bad for equities.”

Malmgren, who was speaking at a Fund Executive Association forum in Australia sponsored by Deutsche Asset Management, told pension fund executives the social fabric of many countries, pointing to Greece among others, was in jeopardy which had a direct effect on the economy, and vice versa.

“As an investor you have to realise parameters in the world economy have changed,” she said.

She said there was a direct connection between the riots in Greece, the hung parliament in the UK and the collapse of the opinion polls for President Obama in the US.

“The debt problem is real for regular people, they have to bear the pain for all this debt. Taxes are increasing but the standard of living is falling. For example, the city of LA recently decided they are no longer repairing the sidewalks because they have no money.

“How do people express their anger over this. In the US it is through opinion polls which is why the incumbents are out of favour, and another option to express anger is to hit the streets.”

“In Greece the best-case scenario will be three years of depression followed by 10 years of recession, we are talking about the sacrifice of an entire generation. And now the German people are saying we don’t want to pay for that with our GDP.”

She said the pain of investors was changing the social fabric of society and envisaged this would be expressed in further violence in other countries, such as Spain and Ireland.

“In the UK at least the pound can devalue,” she said.