Should 3% inflation change your portfolio position?

Now may be the time to go defensive investors have argued after data revealed UK inflation held steady at 3% in October.

The CPI rate was unmoved since September, with the price of food and recreational activities, coupled with sterling’s weakness, pushing prices up.

Despite coming in lower than the predicted 3.1% rate, it marks the highest rate of inflation seen in the UK since 2013 and follows the Bank of England’s recent 0.25% interest rate hike.

As a result, some have opted to approach investment more cautiously. Aegon investment director Nick Dixon said “richly priced” asset classes may start to return to fair value as market conditions change and the central bank considers more base rate increases.

“With inflation at 3%, retail sales stagnating, and wage growth slower than inflation, increased rates will help provide some economic balance,” he said.

“These increases are likely to exceed market expectations, given the limited prospects of the government to raise additional revenue though higher taxes, but should be implemented both slowly and prudently to avoid potential destabilising effects.

“In this changing market environment, richly priced asset classes may start to return to fair value, and a more defensive approach may well be prudent.”

However, Seven Investment Management’s multi-manager duo said they avoided investing in funds viewed through an “inflation prism”.

Damian Barry and Tony Lawrence, said they are not concerned about inflation when choosing a UK equity fund and instead favour contrarian ideas, such as the Majedie UK Focus Fund.

“Majedie are not afraid to be contrarian, hunting up and down the market cap spectrum for ideas, and being unafraid to back maligned sectors,” Lawrence said.

“UK supermarkets and oil majors are two industries that have been deeply out of favour over the last few years, which is testament to the contrarian nature of their thinking. For us, this has been a buy and hold that has served us well, whatever the weather, and we would avoid looking at UK equity funds through an inflation prism.”

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