The developed world is bracing itself for inflationary pressures but Troy Asset Management’s Sebastian Lyon has forecast a ‘little ice age’ of deflation as a more pertinent near-term threat.
The London-based manager said economic momentum could cool further and, while central bank policies will ultimately lead to a spike in the cost of goods and services, deflation may come first.
In a letter to investors, Lyon said: 'GDP forecasts have drifted downwards and the burden of lifting the Western world out of its financial morass has fallen on the US and Germany, despite their growing at well below their historic rates.’
‘Our caution on the UK has been justified and of the major developed nations only Italy and Spain are expected to fare worse in 2013.’
‘While we are convinced the most obvious bull market at the moment - the one in central bank balance sheets - must ultimately lead to inflation, a 'Little Ice Age' of deflation may still come first,' he added.
Across his portfolios, Lyon said he has taken a more cautious approach due to the belief that defensive blue chips also became expensive over this period.
He said this is because income-starved investors piled into the stock market despite falling growth forecasts leading to lower earnings forecasts.
But while Lyon is certain of inflation, he acknowledged that asset allocation timing can prove difficult and has reacted accordingly.
He said: 'Since timing asset allocation for these outcomes is impossible, we have tried to prepare for both by building the portfolio on four 'pillars': blue chip equities, index-linked bonds, gold bullion (including gold mining shares) and cash.'