Having hit 0% back in March for the first time, the UK consumer price index is back at zero inflation for the second time in six months.
While the figure may not come as a surprise, Guy Foster, head of fund research at Brewin Dolphin, explained the fact that the retail price index concurrently rose to 1.1% in August – up 0.1% on the previous month – exposes the flaws in the calculation process of overall inflation.
“We were not shocked by the modest weakness in CPI reported this morning,” he said. “Demonstrating that inflation measurement is a very imprecise science, it is notable that RPI and RPIx – excluding mortgage interest payments; the Bank of England’s former target – actually rose.
“Nevertheless what we saw this month was the continued pass-through of energy related cost falls into headline inflation rates. This pass through is not irrelevant but is hard to model. Our working assumption that higher disposable incomes as a result of falling energy costs would boost incomes has only partially born out. We want to see evidence that consumers are prepared to spend more as those higher incomes seem more permanent.”
Russ Mould, investment director at AJ Bell, believes that the underlying economic characteristics behind the UK inflation figures emphasises the need to select quality stocks with robust fundamentals.
“Today’s inflation figures show that we remain in a high debt/low growth environment, and have done for some time now,” he expanded.
“For investors this reemphasises the importance of investing in companies that have strong balance sheets, good business models and pricing power that they can turn into dividends for investors. If we tip into an outright deflationary environment, these features will become even more important since firms with weak balance sheets will see the cost of debt eating into their profit and hence their potential to offer positive returns for investors.”
However, Tony Yousefian, consultant at Albermarle Street Partners, warned that it is no longer as simple as that.
Yousefian believes that the uncertain market outlook means that trying to pick stocks or being macro-driven should no longer be paramount to investors, and going forward fund buyers will need to use managers that have proven their mettle through previous cycles.
“Volatility in markets is going to continue, and manager selection is now far more important than trying to call stocks,” he said. “This is the time to really bolster your due diligence and pick a manager that can ride through the storm.
“There is no consensus view anymore; no one knows whether we will see inflation picking up or a second wave of deflationary forces. It is crucial that you pick a manager with a long track-record – the longer the better – who has the scars to prove that they can perform in any market.”
Yousefian emphasised that though this does not negate the experience of so-called ‘up and comers’, the safest path is often a well-trodden one.
“It may be the case that this temporarily rules out buying ‘up-and-coming’ managers, but this is making money in a very difficult market,” he expanded. “The only way to understand the different cycles is to have experience of them, and investors need a manager that has been there and done it.
“While some established managers may have underperformed in the very short-term, such as Adrian Frost [on the Artemis Income Fund], he has a long track-record. Neil Woodford is another example – investors need to pick managers who have shown that they are capable of riding the cycle.”
