Central bankers risk creating an "inflationary overshoot" because of their attempts to avoid deflation, the managers of the Ruffer Investment Company have warned.
Delivering the trust's half-year report, managers Hamish Baillie and Steve Russell (pictured) said they are holding inflation-protected assets and equities in order to safeguard investors’ purchasing power.
The UK's consumer prices index fell to 1.9% in January, bringing it under the Bank of England's 2% target rate for the first time in four years. Meanwhile, in December, inflation in the Eurozone fell to a record low.
The duo conceded deflationary forces "remain in the ascendancy" for now, but said they expect central bank actions will lead to a reversal of this trend - and a potential overshoot - in future.
"Our belief remains that central banks will do whatever it takes to avoid deflation, and our primary concern is that in their efforts to do so we will see an inflationary overshoot; it may even be politically desirable to do so," the managers said.
The £323m trust had a tough second half in 2013, seeing the net asset value per share fall from 214.99p to 212.11p despite gains seen across global markets.
Baillie and Russell said performance had been “lacklustre”, with its decision not to hedge US dollar exposure hurting the fund in particular.
Despite a disappointing start to the year for Japanese equities, a key play for the trust, the managers restated their belief that Abenomics will rejuvenate the economy. They said Japanese Prime Minister Shinzo Abe still has “sufficiently dry powder” in terms of stimulus to combat deflationary forces.
In terms of risks to the portfolio, they said a sharp rise in the value of sterling compared to the US dollar, deflation, or a sharp fall in gold, would all hurt.