Aussie bonds good hedge against inflation
Aberdeen Asset Management research has refuted the effectiveness of asset classes that have traditionally been used as hedges against inflation risk.
The research asserted that strategic allocation to Australian inflation-linked bonds was an effective long-term hedging strategy in various market environments.
“Recent interest rate rises by the Reserve Bank have reaffirmed the validity of growing concerns about inflation as the global economy continues its recovery,” said Aberdeen fixed income portfolio manager Justin Tyler. “This is especially the case in Australia where the inflation rate at the beginning of this cycle is starting from a much higher base than expected, given the severity of the recent global downturn.”
Aberdeen’s standpoint is that macroeconomic factors will continue to exacerbate inflationary pressure over the long term. However, Tyler said that the level of inflation protection provided by asset classes could be compromised.
The research paper, Inflation: the Case for Australian Inflation Linked Bonds, asserted that direct property, equities, infrastructure, nominal fixed income and cash did not always provide the best protection against inflation.
The paper asserted that while direct property had been considered as a reliable inflation hedge because of the direct inflation linkages inherent in revenues, suitable assets were scarce and returns based on revenue streams had been subject to volatility in some cases.
It also noted that the performance of equities had not always been consistent, infrastructure could be affected by project-specific risks, and the Reserve Bank might struggle to keep the cash rate within a narrow band.
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