Geopolitics, inflation can’t be ignored

The financial services sector should brace for considerable change as the global financial landscape transforms from the benign conditions of the past decade.

This was the warning from Dr Philippa Malmgren, president of the Cannonbury Group, who said geopolitical pressures and a rising inflationary environment can’t be ignored by financial planners and fund managers in fund selection and portfolio construction.

Speaking at the seventh annual PortfolioConstruction Conference in Sydney, Dr Malmgren warned that many countries — developed and non-developed — had to tackle inflationary pressures, which were likely to affect growth and returns in many of these markets.

“The soft-end of inflation are strikes, while the hard-end of inflation are riots,” Dr Malmgren said. “China has a problem with inflation. Already, there have been 19,000 riots in China over the past 12 months, according to my sources.”

Malmgren told Money Management that the Tibet riots were primarily due to inflationary pressure on food prices and not a sudden desire for independence and democracy.

The danger, she said, was that many emerging markets are responding to inflation by increasing wages. The United Arab Emirates, for example, had increased wages by 70 per cent and China was increasing wages by up to 40 per cent this year.

“Giving more money for people to spend is not necessarily a good thing. It equates to the tiger chasing its tail.”

Malmgren emphasised the importance of considering geopolitics in the current and changing financial services landscape.

“Russia is another good example,” she said. “Russia’s move on Georgia and its backing of Iran with its nuclear program are clear signals that Russia is back and is reasserting its strength on the world scene.

“Western Europe’s reliance on oil from Russia along with Russia’s current sabre rattling to former eastern bloc countries not to join the European Union and NATO has made many European countries nervous.

“As a result, we could well see many of these European Union countries increase their defence spending, which will further add pressure to inflation,” Dr Malmgren warned.

Geopolitical pressures can’t be ignored in fund selection, she emphasised. “Already, we are seeing the collapse of open markets, with the collapse of Doha. These factors will affect world markets.”

Dr Malmgren advised that the three factors that will deliver the financial services sector through the turmoil of the current market are cash flow, margin management and pricing power.