Dieter Gassner, Head G10 Rates & FX at LGT Capital Partners, explains in an interview with finews.com why the latent inflation potential should not be underestimated.


Mr. Gassner, after central banks have struggled for many years to combat low prices, inflation is expected to suddenly start heating up. Why?

To be more precise, inflation has actually been continually rising in the U.S., for example, since April 2015. At that time, the annual inflation rate was still negative at -0.2 percent. Since then the general price level has risen by 1.7 percent. The same holds true for Europe, although the absolute level is much lower.

Hence, central banks have reached their main target with their extremely expansive monetary policy and have averted deflation. After dropping sharply, commodity prices have recovered significantly from their lows, and the oil price is likely to be well supported by the OPEC agreement on production cuts. Political developments are also indicating that inflation will probably move higher.

«We also have to keep an eye on China, which has been exporting deflation for years»

Protectionism and fiscal policy measures are increasing inflationary pressures, as the U.S. labor market is already at full employment, according to official data.

Is this true to the same extent for all countries? Or does it apply primarily to the U.S.?

This development is certainly most advanced in the U.S. But with some delay it will also have an influence on other countries. Its impact will depend on where an economy stands in the business cycle. Growth remains weak in the Eurozone, with unemployment high and lending subdued.

«Even in an inflation scenario, bonds have their place in a portfolio as a defensive investment»

It will take a few more quarters in Europe until we can speak of a definitive trend reversal. We also have to keep an eye on China, which has been exporting deflation for years. Producer prices fell from 2012 onwards. Since September they have been in positive territory again, and by the end of November producer prices were already rising at a rate of 3.3 percent.

What does this mean for investors?

We have had falling inflation rates for almost three decades and very low inflation expectations in recent years due to the need to manage the financial crisis.

As a result, interest rates have fallen to historical lows and bond prices have risen. In a scenario of rising inflation rates, this trend will reverse, which also means that portfolios need to be rebalanced.

«It’s not a question of stocks versus bonds»

Even in an inflation scenario, bonds have their place in a portfolio as a defensive investment. In an environment of rising inflationary expectations, inflation-linked bonds will outperform nominal bonds and so are the better choice.

Doesn’t it make more sense for investors to put their money in stocks instead of bonds when inflation is rising?

It’s not a question of stocks versus bonds. It’s more a question of nominal or real investments. Additionally, some sectors are to be preferred in both the stock and bond segments.

Among equities, sectors should be preferred that are not very sensitive to inflation and interest rates, or that benefit from higher rates, such as financials.

As for bonds, the preferred segments are variable-yield bonds as well as corporate or emerging-market high-yield bonds with shorter maturities and inflation-protected bonds.


Dieter Gassner, Head G10 Rates & FX at LGT Capital Partners, has 24 years of experience in investing. He has worked at LGT since 1991, and since the launch of the LGT Bond Fund Global Inflation Linked, he has been responsible for this portfolio. The fund has received numerous awards for its many years of investment success.