Mott, who runs the £377.1m PSigma Income Fund with Neil Cumming and Eric Moore, described the ultra-loose monetary policy of the world’s central banks as “the greatest financial experiment in history” and warned on its possible effect on inflation.
The manager now sees a 35% chance of an inflationary environment emerging, up from the 25% likelihood he forecast in October 2012. The risk of deflation has dropped from 15% to 10%.
A ‘muddle through’ scenario, when deflationary deleveraging is offset by inflationary policy, has a 55% likelihood, down from its previous 60%. However, the manager sees 0% chance of synchronised non-inflationary global growth.
Mott said: “We think we may be approaching an inflection point where the markets start to worry more about inflation. Why are we more worried about inflation now than we were three months ago? The short answer is that policy has become more and more extreme.”
Offering reasons for these concerns, Mott cited unlimited quantitative easing, “misdirected” ultra-loose interest rate policy, attempts to weaken currencies, the risk the Bank of England might drop inflation targeting and a lack of imported disinflation.
“Inflation erodes spending power and, as consumers, we will all feel worse off. This is particularly true because inflation is likely to exceed wage growth, so real disposable incomes will continue to be squeezed,” the manager added.
“However, a sustained period of steady inflation is the least painful way to erode the debt. Demands for repayment in the future fall in real terms. This is hugely helpful for all debtors, be it the mortgaged householder or Her Majesty’s Government.”
