Deflation will be the biggest threat to investors over the next few years, according to fund manager Threadneedle.
The firm, which actively manages £51 billion of assets, was commenting after the Bank of England’s Inflation Report this week indicated that low interest rates combined with quantitative easing will continue for the foreseeable future.
Threadneedle fixed income manager Sam Hill said: “If the Inflation Report is to be believed, then inflation will spend a good deal of time in the next two years below the two per cent target.
“The level of spare capacity in the economy is the driving force – if the labour market remains unstable and there continues to be a lack of availability of capital at attractive rates in the commercial sphere, the risk really is that inflation could surprise us on the downside.
“However, it’s not surprising that quantitative easing’s approach of ‘printing money’ is fuelling fears about inflation.
“But, it’s important that investors do not view this in isolation. By doing so they may end up making the wrong investment decision, which could mean they lose money in the long run.
“In my opinion, there is a far greater cost if deflationary forces take affect. Restricted access to affordable capital and the paring back of wages could still end up trumping even the formidable stimulus package from the Bank.
“For government bonds, a good deal of the additional supply risk is in the price.
“Downside surprises to inflation are seen as an offsetting support to the market, so investors can have good reason to take a much more balanced approach on the outlook for gilts.
“For those investors worried about the end of a bull market in government bonds or even just believe in short-term volatility then absolute return funds offer the opportunity to benefit from those market conditions.”