Showing posts with label inflationary expectations. Show all posts
Showing posts with label inflationary expectations. Show all posts

Saturday 22 October 2011

Which security offers the best protection against inflation?


The security which offers the best protection against purchasing power risk or inflation is which of the following?

a. fixed annuity

b.
 common stock

c.
 treasury bond

d.
 certificate of deposit



Answers: b
Debt securities and investments that promise fixed rates of returns are the most susceptible to purchasing power risk or inflation. Fixed annuities, CD’s, and treasury bonds all fall under these categories.

Read more: http://www.investopedia.com/ask/answers/10/inflation-protection.asp#ixzz1bSW36QRQ

Monday 20 December 2010

Inflation beating investments

Inflation beating investments

Inflation has hit a new high, but there are options for income seekers.
By Emma Wall 8:00AM GMT 18 Dec 2010

Inflation has hit a new high, with Britain's cost of living rising at the fastest pace seen in six months. The Government's official measure of inflation, the consumer prices index (CPI), hit 3.3pc in November and, even more worryingly, the retail prices index (RPI), which some consider a more accurate inflation reading, rose to 4.7pc last month.

This is another nail in the coffin for Britain's savers. The average easy-access savings account is paying 0.81pc – the effect of the Bank Rate remaining at just 0.5pc since March last year – and making it almost impossible for people to live off the income from their cash savings.

Experts are urging income-chasers to turn to equities, saying the average yield from FTSE 100 companies is more than 3pc and some income funds promise 7pc. Equities do not carry the same guarantees as savings in a cash account, but if you choose the right investment vehicle, income from savings could again be a viable option.

There are two main avenues through which to gain a yield from investing – shares that pay dividends or funds. The UK has some of the best stock markets for dividends.

Nick Raynor, the investment adviser at The Share Centre, likes Chesnara, an underwriter for life assurance products, now at 210p a share and offering a yield of 7.5pc. Royal Dutch Shell "B" is £19.41 a share and offers a yield of 5.6pc.

He also tips Aviva, at 366p, yielding 7.9pc: "Recent weakness in the share price takes the yield to almost 8pc, and the dividend is stable. We believe next year will see the dividend continue to rise."

Mr Raynor also likes Vodafone at 163p a share and offering a yield of 4.8pc and property company British Land at 484p, yielding 5.6pc.

European companies also offer attractive dividends. France Telecom paid a dividend of €1.40 last year – a yield of about 8pc.

If you want to leave stock picking to experts, choose an income fund. There are straight equity income funds, bond funds and those that invest in a mixture of the two. Equity income funds hold a selection of companies for a chosen region, such as UK, Europe, emerging markets or global funds.

There are fewer dividend-paying companies in the emerging markets region, but the number is increasing, and as it does more funds are expected to launch.

There are 75 UK equity income funds, with the top-performing over the past five years being Halifax UK Equity Income. Based on £1,000 invested, with the income accumulated, the Halifax fund has returned 42pc.
Troy Trojan Income, Unicorn UK Income and Aviva Investors UK Equity Income funds have all returned more than 35pc in the same period.

If you are after an even bigger rate of interest, you could try an enhanced income fund. This is a fund that operates in tandem with a traditional income fund and sells call options on the income fund's holdings.
Enhanced income funds aim to generate a higher income (typically a yield of 7pc a year compared with the average income fund that is now yielding 4.8pc), but at the cost of sacrificing some of the capital growth associated with shares – and they do this using complex derivatives known as options. The funds sell options, for which they receive a fee, on shares held in the portfolio based on a prediction of how the share price will rise in a three-month period.

Enhanced income funds are able to offer much higher yields than traditional income funds because of the fee they get for selling the option. There are only a handful on the market, but there are plans to launch more.

Opinions are divided as to whether they carry a higher risk than traditional income funds. Michael Clarke, the manager of Fidelity's Enhanced Income fund, said he tried to ensure as safe an investment as possible.

In opting for high income, you also lose out on capital growth, so investors need to weigh up whether they are prepared to limit capital growth potential for a little bit of extra yield. Schroder Income Maximiser yielded 7.18pc in the past year, Fidelity Enhanced Income 7.39pc, Newton Higher Income 7.97pc and Insight UK Equity Income Booster 8.76pc.

http://www.telegraph.co.uk/finance/personalfinance/8209610/Inflation-beating-investments.html

Wednesday 17 November 2010

Inflation does matter in China and the world

Inflation does matter in China and the world
By Huang Shuo (chinadaily.com.cn)
Updated: 2010-11-15 16:58

The growth rate of China's consumer price index (CPI) was 4.4 percent year-on-year in October, a 25-month high. The rate is up 0.8 percentage points from September. This is an alarming statistic for a country that for the past three decades has had steady economic growth. Inflation risks do matter for China.

In particular, the new factor of a rise in prices, main promoter for CPI growth, took up 3 percentage points of the 4.4 percent surge. Prices of agricultural products and food have been playing major roles in contributing to the CPI hike. Food prices surged by 10.1 percent compared with the same period of last year as a result of the price hike in international agricultural products, and the recent flood in South China’s Hainan province affected vegetable prices and oil prices, adding to the product costs, said Sheng Laiyun, spokesman for the National Bureau of Statistics (NBS).

In addition, daily essentials such as eggs and vegetables are leading the price increases in China's consumer market, followed by meat, oil and white sugar.

As the industry generally expected that about 4 percent would be the proper answer for CPI, the final data released by the NBS on Nov 11, 2010, was 0.4 percentage points higher than estimated, which astonished the public and drew lots of attention from domestic and foreign experts.

Consumer prices associated with social stability are the top concern of the public in China. The increase of CPI indicates that the surge in commodities prices is ongoing in the consumption market, closely linked with the daily lives of ordinary people. China’s income per capita still lags behind the United States, the European Union, and even some other emerging economies. How to increase income and stabilize or lower the prices in the market, especially for daily essentials, should be attached great importance by the government.

Livelihood is like the basis for constructing a building, which lays the firm foundation for a harmonious society. Whether people can lead a good life decides the quality of governance by central and local authorities. High consumer prices pose an unstable economic factor to improving the living standard of people.

More regulations are expected for the soaring Chinese CPI. As to that situation, the People’s Bank of China, the central bank of China, has noticed and adopted a measure increasing the required reserve ratio by 50 basis points and coming into effect on Nov 16, 2010, in order to ease the pressure from the second round of quantitative easing policy (QE2) by the Federal Reserve of the US and increasing liquidity caused commodity prices to rise in China. But is it enough to merely depend on national economic regulatory authorities?

Every economy released loose monetary policies to conquer the challenges brought by the international financial crisis in 2008 and get out of the recession. But side effects are inevitable. Rising inflation is one of the consequences. As a result, countries with expansion policies on issuing more currencies should work together and reach agreements to confront the emerging side effect -- inflation.

The author can be reached at larryhuangshuo@gmail.com.

http://www.chinadaily.com.cn/business/2010-11/15/content_11552427.htm

Thursday 11 November 2010

Unknown consequences of QE2

Unknown consequences of QE2

2010-11-09 14:11
Unknown consequences of QE2
With oil hitting a two-year high, gold rallying to an all-time peak, and most global stock and commodities markets in a sharp upswing, the US Federal Reserve (Fed) has proved its capability to drive up the world's inflation expectations.
Yet, unfortunately, it remains unknown if the Fed's announcement last Wednesday to purchase $600 billion of Treasuries has any chance of succeeding in effectively reviving the sluggish US economy. Moreover, the second round of quantitative easing, or QE2, has given rise to international concerns that the move will only increase global economic uncertainty.
Last Friday, Zhou Xiaochuan, governor of China's central bank, pointed out that the Fed's move was "not likely" to benefit the global economy, because there may be a conflict between the international role and the domestic role of the US dollar.
The Fed's move to print more money may help boost employment and maintain a low inflation rate domestically, but it will bring a flood of liquidity to the global economy, especially to emerging economies, and drive inflation expectations to dangerous levels.
Last week, German Finance Minister Wolfgang Schaeuble criticized the Fed's capital-injection for its potential to "create extra problems for the world" and cause "long-term damage".
The German minister noted that the huge economic problems of the United States should not be tackled with more debt, as cutting deficits, rather than adding more, was one of the priorities among all developed countries.
Equally worried was Robert Zoellick, president of the World Bank, who even suggested a modified global gold standard to guide currency movements.
Admittedly, a return to using gold as an anchor for currency values is probably premature, even though gold prices are more solid than ever. But it is now quite obvious that the current international system cannot afford doing nothing about the latest US attempt to revive its economy with the help of the central bank's printing press.
If US policymakers turn a deaf ear to such international criticism over its latest attempt to stimulate its economy's slow recovery, they will risk undermining other countries' efforts to normalize their monetary and fiscal policies for a lasting recovery.
Worse, the phenomenal inflationary impact that QE2 has so far exerted on the global market could be just the tip of the iceberg. There will undoubtedly be unknown consequences of printing such a large amount of US dollars, a key international reserve currency that is widely used in international commodity trade, capital circulation and financial transactions.
The international community should make it an issue for serious discussion at the G20 summit in South Korea later this week. It is necessary to drive home the message that neither a country, nor the world as a whole, can reflate its way out of a crisis as wide and deep as the one that we are all still suffering from.

Friday 29 October 2010

UK: Interest rate rise prospect on inflation outlook

Inflation expectations have edged higher this month, piling pressure on the Bank of England to raise interest rates.

 
Interest rate rise prospect on inflation outlook
Interest rate rise prospect on inflation outlook Photo: ALAMY
According to a Citi and YouGov public poll, expectations for inflation over the coming year currently stand at 3pc, compared with 2.9pc in September.
"Inflation expectations for the year ahead have not been higher since September 2008," Citi economist Michael Saunders said. Inflation was then running at 5.2pc – a 16-year high – compared with 3.1pc currently.
Policymakers are concerned that rising inflation expectations could become self-fulfilling by working through to prices and wage settlements. Mervyn King, Governor of the Bank of England, has previously warned: "If that were to occur, it would be costly to bring inflation down."
Interest rates would have to rise, potentially ction expectations are becoming embedded. Most pay deals were worth between 2pc and 3pc in recent months, below the rate of inflation, according to a study from Incomes Data Services published today.rippling the recovery which is reliant on a loose monetary policy offsetting the spending cuts and tax rises. Most economists expect interest rates to stay low at least until the second half of next year, and many think the Bank will restart quantitative easing with an additional £50bn.
"The uptick in long-term inflation expectations... may well reflect actual inflation data, with UK inflation well above target and well above [Bank] forecasts," Mr Saunders said.
To date, though, there is little evidence that higher infla

http://www.telegraph.co.uk/finance/economics/interestrates/8091029/Interest-rate-rise-prospect-on-inflation-outlook.html

Thursday 12 August 2010

21 Evils of Inflation (Video)

http://video.google.com/videoplay?docid=-6484061137769305763&hl=en&emb=1#

21 Evils of Inflation - Prof. Krassimir Petrov
59:42 - 3 years ago
A 60 minute lecture by Prof. Krassimir Petrov at the American University in Bulgaria explaining 21 negative effects from inflation.

Thursday 9 April 2009

Inflation Expectations for Beginners

Inflation Expectations for Beginners

James Kwak Apr 9, 2009
For a complete list of Beginners articles, see Financial Crisis for Beginners.

Only a few years ago, the accepted remedy for a recession was for the Federal Reserve to lower interest rates - namely, the Federal funds rate. Now, however, the economy has been stuck in recession for over fifteen months and the Federal funds rate has spent the last several months at zero. (The Fed funds rate cannot ordinarily be negative, because one bank won’t lend $100 to another bank and accept less than $100 in return; it always has the option of just holding onto its $100.) As a result, the Fed has resorted to other policy tools, most notably large-scale purchases of agency and Treasury securities, funded by creating money. (Here’s James Hamilton’s analysis.)

As the Fed’s monetary policy plays a more prominent role in the response to the economic crisis, there will be more talk of inflation or, more accurately, inflation expectations. While inflation is what affects the purchasing power of the money in your wallet, inflation expectations are what affect people’s behavior in ways that have a long-term economic impact. Take the case of wage negotiations, for example: a union that believes inflation will average 5% over the life of a contract will demand higher wage increases than a union that believes inflation will average only 1%. Once those higher wages are built into the contract, the employer is forced to raise prices in order to cover those wage increases, and inflation begins to ripple through the economy.

One of the major objectives of modern monetary policy is to control inflation expectations, because controlling inflation expectations is the first step to controlling inflation. If there is a short-term burst of inflation - as we had a year ago, if you look at headline inflation numbers that include the prices of food and energy - the macroeconomic consequences can be limited if people believe that the Fed can and will bring inflation under control.

Unfortunately, it is impossible to know exactly what people’s inflation expectations are; in fact, it may not even be a sensible question, since different people have different understandings of what inflation is. However, there are three main approaches to estimating inflation expectations.

1. Inflation-indexed government bonds. (If you need a refresher on how a bond works, read the first part of this article.)

A traditional bond is a stream of payments that is fixed in nominal terms: for example, $100 in 10 years, and 6% interest, paid semi-annually ($3 every 6 months). Such a bond is not inflation-indexed; if inflation goes up, the purchasing power of that $100 goes down, and it’s too bad for the bondholder.

An inflation-indexed bond, by contrast, pays an amount that is indexed to some measure of inflation. In the U.S., where these bonds are called Treasury Inflation Protected Securities (TIPS), we use the Consumer Price Index. A TIPS bond may have a $100 face value and pay a 2% interest rate. However, every 6 months, that $100 face value is adjusted to reflect the change in the CPI, and the interest payment is calculated as a percentage of the adjusted value of the bond. Then, after 10 years, the bondholder gets back not $100, but $100 times the ratio between the CPI at the end of the period and the CPI at the beginning of the period. This way the bondholder is guaranteed a 2% real return (assuming he paid $100 for the bond), no matter what the rate of inflation is in the interim.

The implied inflation expectation, then, is the difference between the yield on an ordinary bond and the yield on an inflation-indexed bond with the same maturity. If the 5-year Treasury has a yield of 4% and the 5-year TIPS has a yield of 2%, then inflation expectations for the next five years are (about) 2% per year. The reasoning is that in order to buy the regular bond as opposed to the inflation-indexed bond, an investor has to be paid a higher yield to compensate him for the level of inflation that he expects.

Actually, in addition to expected inflation, the Treasury investor also has to be paid an inflation risk premium because, all things being equal, it is better not to have inflation risk than to have it. So the implied inflation expectation is actually slightly less than the spread between the regular and the inflation-indexed bonds. If you didn’t follow that, don’t worry, just remember that, roughly speaking, Treasury yield = TIPS yield + expected inflation.

2. Inflation swaps.

These are a type of derivative contract, where the payments under the contract depend on the value of an inflation index, such as the CPI. The swap has a nominal value of, say, $100, but $100 never changes hands. Instead, at the end of some period of time, party A pays party B a fixed rate of interest on $100 - say 2.5% per year. At the end of the period, B pays A the cumulative percentage change in the inflation index over the period. Assuming A has $100 in his pocket, he has now hedged the inflation risk on that $100, because no matter what happens, at the end of the period he will get an amount that compensates him for the impact of inflation on his $100. The price of this hedge is $2.50 per year. (Because these are over-the-counter contracts, there many variations on this, including swaps with periodic coupon payments.)

For the same reasons described above, the implied inflation expectation is roughly 2.5% per year: party B thinks inflation will be less than 2.5% per year, and therefore is willing to take 2.5% and pay the amount of inflation; party A thinks inflation will be more than 2.5% per year, and therefore is willing to pay 2.5% per year to get the amount of inflation back. So the market clears at 2.5%. (Actually, for the exact same reasons as with bonds - party B has to be paid an inflation risk premium for absorbing the risk in this trade - the inflation expectation is slightly less than 2.5% per year. There are also some complications having to do with the lag in the publication of inflation indices, but let’s ignore that for now.)

One curiosity is that the inflation-indexed bond method and the inflation swap method can produce different estimates. Theoretically this should not happen, because if two products that will have the same price in the long term (since they are based on the same index) have different prices today, there should be an arbitrage opportunity. Why this happens in practice is discussed on pp. 5-6 of this Bank of England paper. (Thanks to Bond Girl for pointing out the paper.)

3. Surveys.

You can also just ask people what they think inflation will be. Economists ordinarily prefer markets, under the principle that when people are paying money they are signaling what they really believe. But if you think there are sufficient problems with the markets you may want to go with surveys. Tim Duy has a post with a number of charts, including one of an inflation expectations survey.

So what do things look like today?

For more on measuring inflation expectations, there is a short primer from the San Francisco Fed, as well as the Bank of England paper mentioned above.

http://www.rgemonitor.com/us-monitor/256336/inflation_expectations_for_beginners

Thursday 7 August 2008

Foreign exchange risks

The roles of the central bankers and the governments are to ensure reasonable GDP growth, to manage inflation and to keep unemployment at a low rate. At anytime, their policies will be driven by the targets they choose to focus on. These can be done through fiscal and monetary policy.

The NZ and Australia government have both chosen to stimulate the growth in their economies by reducing interest rates. Their action will translate into weaker NZ and Australian dollars. Similarly, the interest rate in UK has been reduced to stimulate its weakening economy. The property prices in UK has also fallen by 10% to 20%. Japan has grown its GDP the last 5 years, but this year is likewise facing headwind given the downturn in the world economy. The yen is expected to weaken this year.

The Euro is expected to gain in strength since the ECB has chosen to control inflation by increasing its interest rate. China yuan is expected to continue to strengthen this year. The US dollar decline is not expected to continue and probably has bottomed recently. It may even strengthen slightly going forward.

What of the Malaysian ringgit? Due to the recent large hikes in oil price and electricity tariffs, the Malaysian inflation is at a high at present. This is expected to attenuate going forward. GDP is expected to slow down from 5% - 6% to 4.5% - 5.5% for this year. At present, the central bank has not felt the need to temper with the interest rate given the inflation expectation is not a problem presently. Nevertheless, the cost for borrowing for the public has increased.

My guesses are the UK pound, Australian and NZ dollar and Japanese yen are expected to weaken. The Euro, Chinese yuan and probably the US dollar, are expected to strengthen.

How will these various currency movements affect the KLSE counters that have significant business overseas? How will these movements affect capital flows seeking higher investment returns in the world?