Inflation hedging – bootleggers riding on a wave of consumer spending

9 Oct

In wake of the news that consumer spending grew three percent in September, the fastest rate since May 2009, those who dabbled in inflation hedging this last quarter could have reached the crest of the wave in profits.  Spending over the previous 11 months was lower than a year earlier, according to data collected by Visa from its card users – though a minor increase in August could signify the beginning of an ongoing trend. Will the high-street binge continue, or has it already peaked? Both alternative asset managers and institutional investors have a lot riding on the answer.

Canny investors have not been slow to pick up on the development. F&C’s latest Liability Driven Investment survey showed that inflation-linked liabilities reached £18.5bn in Q2 of this year, almost three times the figure for the same period in 2011. Retail price index swaps are popular on a range of assets. Increasingly, government bonds are being marketed linked to inflation as well.

Other investment strategies are proving difficult for hedge funds in the current UK market. M&A arbitrage is restricted to a dwindling pool of companies. Activity relating to mergers and acquisitions fell by almost a third in the last quarter, according to recent data from accountancy firm Ernst & Young. This is twice the rate of decline worldwide. UK companies’ profits are declining at a slower but still noteworthy rate. Office of National Statistics (ONS) showed that British private non-financial corporations had a net rate of return of 12.7% from April to June, compared to 12.9% between January and March.

surfing a bottleneck?

surfing a bottleneck?

Why is spending rising but profits falling? Well, Visa’s report showed the bulk of the increase was in “face-to-face” sales at high street stores. So while the tide has not turned for British manufacturing output, or export sales, it seems the hopes of its economic recovery are riding on another consumer spending bubble, with swelling liquidity the product and cause of further uncertainty, about rafting one’s capital to long-term investments. Will another round of QE make inflation hedging an even more profitable prospect? It seems fund managers, by linking newly issued gilts to the RPI, have found a way of maintaining their value where the government proved unable to.

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