Deflation warning
Saturday, January 31st 2015, 3:34PM
Pengana has issued a warning about deflation.
Fund manager Rhett Kessler said many companies in Pengana’s portfolio were increasingly concerned about the low but increasing risk of deflation.
“The consensus approach to forecasting inflation appears to be constrained to the size of a positive number. This is reminiscent of what occurred pre-GFC as consensus earnings forecasts came down from double digit to low or flat earnings rather than the required negatives.”
He said there were a number of reasons for concerns.
Japan’s attempts to create inflation were devaluing the yen and had the potential to ignite a global currency war.
The slowing global economy had reduced demand for commodities, leading to softer prices.
Technology-driven efficiencies were reshaping industries.
Global monetary authorities had used up many of their conventional tools. “In spite of co-ordinated and concerted efforts inflation globally has been falling and in some cases already turned negative. The implications of a deflationary environment on wealth preservation and creation are significant. Importantly, notional interest rates understate the true cost of debt in a deflationary environment (as opposed to over stating it in an inflationary environment),” Kessler said.
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