Protect Your Wealth From Inflation By Building On Real Assets

15.09.09

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

As the population of the world increases there will be a greater demand on necessities linked to consumer prices such as oil, energy and food. This in turn may put pressure on inflation which can

As the population of the world increases there will be a greater demand on necessities linked to consumer prices such as oil, energy and food. This in turn may put pressure on inflation which can threaten your long-term financial security and that of your heirs. Add to this the possibility of higher taxation for many years ahead and your wealth needs to be protected from these threats.

The financial crisis has impacted on the world economy. In many countries inflation has dropped significantly but economists predict that it will return as the fiscal recovery gets under way. Stimulus packages, low interest rates and quantitative easing measures to encourage a move towards financial health could well bring on the return of higher inflation. It is important to shield your financial assets as much as possible now from damage by future inflation.

One area where many people?s portfolios are lacking is in real assets ? tangible assets such as roads, land, buildings, equipment, commodities, minerals and oil. Real assets can be expected to be durable during periods of high inflation, although they can offer attractive returns during low inflationary times as well.

Investing in real assets is not actually a new idea and pre-dates financial assets. Until recently it has been very difficult, if not impossible, for individual investors to access these types of assets. For example how many investors can afford a toll road, a bridge or can store barrels of oil? If you are thinking of real assets as an investment consider the following areas:

Population growth and trends

In 2009 the world population is around 6.8 billion. It has almost doubled since 1970 and over the next forty years it is predicted to expand by nearly another 3 billion. It is estimated that before the end of the century the world population could reach 12 billion. The largest growth sectors are in Asia, Africa and Latin America ? developing areas where the demand for more infrastructure, food and energy is likely to increase considerably.

Europe has already seen much new or improved infrastructure in the form of roads, airports, sewerage and water systems, housing and government offices to cope with the demand boosted by migration.

Infrastructure

Infrastructure can include: transport (roads, bridges, airports, seaports, rail lines, parking etc); energy (electrical grids, renewable energy, pipelines, oil storage, distribution etc); water (clean water provision, desalination units, wastewater management etc); communications (cellular phone towers, telephone land lines, cable networks, satellites, etc); and social (schools, hospitals, social housing, prisons etc).

Investing in infrastructure has been around for a long time, but the listed market is an exciting new area which can be expected to experience significant growth over the coming years.

Strong domestic growth in China, India and other emerging Asian nations is creating huge pressure for extensive new infrastructure. A new book entitled Infrastructure for a Seamless Asia released by the Asian Development Bank and the Asian Development Bank Institute says that rapid economic growth in recent years has put enormous pressure on Asia?s transport, energy, and communications infrastructure and unless these can be improved they will continue to be a bottleneck to growth, a threat to competitiveness, and an obstacle to poverty reduction.

The book notes that Asia?s trade competitiveness, particularly in its increasingly sophisticated production networks, depends to a large extent on efficient, fast, reliable, and seamless infrastructure connections. But many parts of Asia, including inland and remote areas, landlocked countries and distant islands, are isolated economically as well as geographically.

Asia has enormous untapped economic potential,” said ADB President Haruhiko Kuroda. “Connecting its diverse economies and peoples through seamless infrastructure will help in achieving an integrated, poverty-free, prosperous, and peaceful Asia and the world.” Kuroda said that increasing infrastructure investment should remain a priority for governments during the current global financial crisis.

Commodities

Commodities tend to increase in price when inflation rises. Commodities are needed for survival and with a greater demand the price of commodities is likely to increase.

Commodities can include: agriculture (corn, wheat, sugar, coffee, cotton etc); livestock (live cattle, pork bellies, greasy wool etc); industrial/precious metal (gold, silver, copper etc) and energy (crude oil, heating oil, gasoline etc).

As the world population grows, developing countries acquire more wealth and the tastes of those of the developed world, and the global need and desire for commodities will be far greater than even today. Climate change is having an affect on agricultural production and even infrastructure. Structural repairs and rebuilds will be continuously required as well as ways to expand food and energy supplies.

Property investment

Investing in real estate has always been a sound investment but property has its limitations in that it is not widely accessible to all investors. Even where it is possible to buy a real asset such as a house, it is difficult to adequately diversify and it can take a long time, and be expensive to buy or sell property. Money has to be spent on maintenance, stamp duty, estate agents, solicitor?s fees and council tax.

Investing in real estate securities gives you exposure to the distinctive advantages of property assets but without the limitations of buying property directly.

Protecting your capital against long-term depreciation due to inflation is a crucial aspect of preserving your wealth for your future. Real assets are often overlooked when choosing your portfolio but now could be a good time to take advantage of the potential opportunity of real assets. An established financial adviser like Blevins Franks can help you to decide on a suitable asset allocation that meets your requirements.

By Bill Blevins, Managing Director, Blevins Franks

11th September 2009

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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