Jupiter’s Chatfeild-Roberts: Inflation is ‘Achilles heel’ for UK economy

John Chatfeild-Roberts 2 Jupiter 2012

Jupiter head of multi-manager and chief investment officer John Chatfeild-Roberts sees inflation as the Achilles heel of the UK economy due to the Government’s addiction to quantitiative easing.

The current programme of quantitative easing is £375bn of asset purchases. He believes the Bank of England is trying to create inflation to reduce the value of debt.

He says: “I suspect the Government is hooked on quantitative easing and they will find it difficult to stop it before it overflows, which in other words is inflation.That is why the prices of assets have gone up and the worry is that it will spill into the prices of what you and I buy.”

This, he says, will have long-term effects on not just the UK but all developed economies using quantitative easing.

“Arguably, what we are seeing is the shift in the balance of power towards emerging markets, the up and coming generation. As an investor, you are trying to retain purchasing power of your money. If you look over the next 100 years, the sterling and the dollar will lose a lot of purchasing power compared to the renminbi and probably other emerging market currencies,” he says.

Chatfeild-Roberts remembers inflation at 25 per cent in 1975, which he recalls were “quite scary times”.

“You can imagine inflation being towards the double-digits. As inflation goes up, central banks after a certain time, then try to stop it. To stop inflation, rates have to be put up, but at the moment Meryvn King is saying that rates are going to stay at these levels for a long time. The Bank of England thinks we are third of a way through the financial crisis, which means another ten years.”

Chatfeild-Roberts has predicted double digit inflation in the next five years but says even if this is overly pessimistic, this is only in regards to the timescale.

‘Perhaps my five year time horizon is not long enough, but near double digit inflation seems to me to be the inevitable outcome.”

However, this does create an interesting opportunity in markets, with the US Federal Reserve announcing the latest round of ‘unlimited’ QE and the European Central bank finally taking decisive action.

He says: “Just now, it is interesting time, as we have just had the announcement of further quantitative easing and we have had Draghi’s pronouncements. As a holder of risk-assets, probably now is more the time to be on the front foot than it was two months ago.”

“We have held very little in European assets for a considerable while and I think it is probably likely that European assets are more attractive than they were a year or so ago.”

He adds that the team is “probably” going to start allocating back into European assets.

“There is no doubt of the willingness of the European political elite to do almost anything to try to keep the Eurozone together. Politically, my heart says that the euro is a doomed construct that is creating all sorts of problems and pressures across the continent and therefore should be consigned to the history books.

“My head says the likelihood is the Euro will survive because of the willingness of the European political elite to do anything for a considerable period of time. It will create a lot of misery and unhappiness for a lot of people.”

Chatfeild-Roberts regrets having exposure to Japan in the multi-manager range.

He says: “In reality, we would have been much better not to have any Japan exposure at all. We did not get it right. Japan has been relatively a poor performer to other markets.”

He says he sold some Japan exposure in the summer because he has found better opportunities elsewhere.

“Japan has got a population issue in that its population is ageing. It has much bigger government debt problem than we have but it has got a very resourceful people and has adapted over the last 20 years. Nine per cent of the companies that yield more than 3 per cent are Japanese companies. So there is value but in the short-term we would have done better having money elsewhere.”

It may appear that now is a more trickier time than ever to invest with market volatility. Chatfeild-Roberts says that markets have evolved but what has not changed is the small number of good managers out there.

“From 2007 to 2009, it has been a particularly difficult time in the markets. We have found that it is better to have older, more experienced fund managers on the case who have seen things happen before, rather than younger and more enthusiastic ones who perhaps trip up a bit.”

He says that despite this, the Merlin team are always on the look-out for young talented managers.
One traditional hedge agains inflation is gold, but Chatfeild-Roberts advises caution on this asset and says: “My expectation is that at some stage gold could become a bubble. We would want to exit it by that point.”

As well as inflation, Chatfeild-Roberts expects the long-term investment outlook for developed economies to be essentially low growth.

Writing in Money Marketing recently, he said: “We think that the “New Normal” for the world economy will be that of a low growth, low return world. But we look upon this as an opportunity and not a threat for our investors. The West, in particular, is in the early stages of a prolonged period of structural reform.”

He says this environment does still offer investment opportunities but means that finding the right companies at the right price becomes even more important.

What he has learnt from throughout his time as a fund manager is “learning to not give into the psychology of human beings”.

“Learning to buy things when it feels really difficult. This is probably the most important thing as an investor.”

Born: UK, 1962

Lives: Leicestershire

Education: Economics at Durham University, Fellow of the Chartered Institute for Securities and Investment

Career: Jupiter: 2001-present: chief investment officer, Jupiter; 1995 – 2001: director and head of multi-manager, Lazard; 1990-1995: diector, Henderson; 1988 – 1989: Midas Cars Ltd; 1985-1988: British Army

Likes: Spending time with the family, cricket and horses

Dislikes: Avocado!

Drives: Renault

Book: Catherine The Great by Robert K Massie

Film: The Sting