"The latest consumer price index already shows that cost increases are running above the Reserve Bank’s 1-3% target range," Brighouse says.
"We believe that NZ’s inflation could reach 4-5% in the year ahead. An alarm bell has sounded for investors."
Brighouse says this will impose costs on the economy that result from inflation itself and from those that result from the Reserve Bank’s efforts to bring it under control.
"Savers clearly suffer a loss of purchasing power if they have locked in a fixed income stream on the assumption that it will provide a positive, inflation-adjusted return.”
"Businesses will suffer if they are unable to pass on price increases. This may vary considerably across sectors but the worst affected will be those that are price takers and whose costs have a high labour or oil component."
How investors will fare in a period of high inflation will depend on how they are positioned. Those who choose assets whose cashflows rise with inflation may be well insulated from the negative effects.
"International assets may be very useful to have as rising inflation could result in a fall in the value of the New Zealand dollar," Brighouse says.
A fall may be further encouraged by the high current account deficit which reached 8% of GDP in the June quarter and is forecast to go higher still.
Brighouse is recommending that investors look beyond New Zealand to investment in Australia, the recovering European markets and Japan, which is now shrugging off more than a decade of economic weakness.
"Our asset allocation views are clear. We favour international equities – particularly outside the United States – for the growth portion of portfolios."
As a defensive measure against inflation, Arcus is recommending infrastructure assets and cash.
"Even in an uncertain and volatile environment, attractive opportunities for investors are still present. As the third quarter of this year demonstrated, good results can be achieved even when some large sectors of the investment universe, such as the US sharemarket, post very modest returns. The Morgan Stanley Capital Index rose 7.5% in the September quarter despite the US sharemarket returning 3%."
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