Investors face a new period of volatility as low interest rates are contributing to increasingly sensitive portfolios and rising risk of “inflation shock”, according to a fixed income investment firm.
Ardea has issued a warning to investors to avoid “inflation complacency” due to the powerful impact of unexpected inflation outcomes on volatility.
Ardea’s principal, Tamar Hamlyn, noted that the market interest rate expectations for the next 12 months had changed by nearly 40 basis points in the space of two weeks following the March quarter surprise inflation result.
“This was a large shift in an already flat interest rate environment, which resulted in substantial volatility in the Australian bond and currency markets,”
“Any complacency could be dangerous, given that even a modest uptick in price pressures would have a large impact on interest rate sensitive assets,” he said.
Additionally, according to Ardea, the risk of inflation shock was particularly high for investors in the retirement phase or those seeking to expand their ageing client base.
“For investors managing drawdowns in capital to fund retirement living standards and maintain spending power, it is particularly important to recognise and manage inflation risk volatility, as these investors lack the ability to accrue the benefits of compounding as their capital is withdrawn — particularly if this occurs during periods of market volatility,” he added.
