sovereign funds are buying up property and commodities betting on inflation
News Posted On: 23 November 2009
We have been arguing in recent articles that the current property recovery is more than just a reaction to low interest rates and stimulus packages. It is also about protecting wealth from a destruction in the value of money.
It seems we are not alone in this view. On Friday Reuters reported that Sovereign wealth funds are investing more in property and commodities to hedge against currency devaluation following the massive bail-outs and residual debt level of Western governments.
"There is quite a lot of interest in real estate and other long-term hedges against inflation," said David Smart of Franklin Templeton in a Reuter's interview on Friday.
Smart's team is responsible for around $40 billion worth of sovereign fund and international organisational investment. The total value of all wealth funds is over $3 trillion. This money is looking for the combination of yield and relative safety offered by property, inflation-linked bonds and commodities.
While not expecting hyperinflation, at least yet, Smart said core inflation could hit 3-5 percent levels in developed countries, well up from the 2% seen before the credit crunch hit the global economy.
While government measures valued in trillions have ameliorated the worst recession for 60 years, the concomitant monetary growth has stoked fears that inflationary pressures are now built-in.
According to Smart his sovereign clients want real estate with UK commercial property a prime target, which can yield 7.5 to 8 percent in rental revenue. US commercial property on the other hand is seen as vulnerable to further falls.
"The price adjustments (in the U.S.) have not been nearly as savage as they have been in the other markets. There are a lot of issues on debt financing which have not really been addressed," said Smart.
After a quiet first half of the year Wealth Fund activity has picked up. Barclays estimate that state investors like China and Abu Dhabi are currently invested 61 percent in natural resources. Smart noted that "From a currency perspective, the fact that sterling has declined quite a lot means in dollar terms you are getting something that would have cost you 50-60 percent more 18 months ago."
Sterling looks set to lose further purchasing power going forward since the UK is essentially in the same financial boat as the US.
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