HSBC has launched its Global Inflation Linked Bond fund with overweights to the US and Japan, but an underweight to the UK.
The portfolio allocation is 35% US, 25% UK, 25% eurozone (primarily France and Italy) and 10% Japan.
Managed by quantitative strategies CIO Jean-Charles Bertrand, the fund invests in sovereign debt and is benchmarked against the Barclays World Government Inflation Linked index All Maturities, hedged in US dollars.
Bertrand has been running the portfolio since July, although it only opened to external investors this month.
He says assets are very attractive as markets expect inflation to remain low in the short to medium term.
“If you look at the markets, they are 100% predicting inflation will return to historic levels of 2% to 3% over the medium term in developed countries,” he says.
“However, we believe central banks are no longer biased against inflation and are willing to accept a higher level in order to avoid deflation at any cost.
“In our view, it is relatively cheap to buy protection against inflation.”
Bertrand says the US and Japanese markets offer particularly attractive valuations, while the UK is slightly more expensive.
“It may seem strange to buy Japanese bonds when they have deflation. However, we do not think deflation will be as strong as the market expects,” he says.
“The UK is not as cheap as other developed markets. This is in part because of pension fund demand for inflation-linked bonds and also because the market is giving too much weight to recent inflation.”
UK CPI was 3.2% in June, a fall of 0.2% on the previous month, but well above the Bank of England’s 2% target.
