Partners Group warns of rising inflation

Henning Eckermann, the Swiss alternatives manager’s chief economist, warned investors gathered at the Infrastructure Investor: Europe 2010 forum that developed markets face 75% chance of inflation in the range of 5% to 7%. As a hedge, he recommended they increase their exposure to real assets.

The investment climate for infrastructure is likely to be marked by a rising inflation and higher interest rates as governments worldwide pay the price for the economic stimulus and rescue packages they bankrolled during the financial crisis.

This was the message delivered today by Henning Eckermann, chief economist of Partners Group, the Swiss alternative investment manager, to the group of some 200 delegates gathered at the Infrastructure Investor: Europe 2010 forum in Berlin.


Eckermann estimated that there is a 75 percent probability that inflation in the future will range between 5 percent and 7 percent across developed countries, versus the “old” rate of 1 percent to 2 percent that investors have become accustomed to. He assigned the latter scenario a 10 percent probability, while a third “double-dip” scenario with inflation rates even worse than the 5 percent to 7 percent scenario scored a 15 probability.

“So our mid scenario is some kind of ‘stagflation’ scenario,” Eckermann said, referring to the phenomenon where a country’s economic growth stagnates and inflation rates are high.

Inflation is a key consideration for investors in infrastructure since the asset class is often sold on the understanding that it provides protection against inflation. And for pensions, the core group of end-investors in infrastructure funds, inflation often accounts for a sizeable chunk of their future liabilities, creating a need for a hedge against inflation.

Eckermann blamed what he called his “inflation fear” on the debt accumulated by governments as a result of stimulus and rescue packages they unveiled during the financial crisis. And even if his fears do not pan out, though, he still warned investors to prepare for rising interest rates that could result from increasing risk premiums.

With this in mind, Eckermann recommended investors increase their exposure to real asset classes, such as infrastructure, and prefer private market investments over public equities, which are provide no inflation protection.

Turning to geographic preferences, Eckermann said developing countries, such as Brazil or Russia, are in general best positioned to prosper in the post-crisis global economy. He cited two specific opportunities that Partners Group had noticed. in developing countries In Russia, the government has adopted a new regulatory framework for power transmission and distribution assets that could give investors a regulated return of 11 percent to 12 percent per year from 2012 onwards. In Brazil, waterway transportation is 50 percent cheaper than roads but has a marginal share of the country’s overall transportation market due to lack of investment to date.

European countries, despite their low growth and higher inflation potential, were not without their set of opportunities. Eckermann said transportation assets on the continent are valued so low that they are more than compensating for low traffic growth and inflation in the short term. And returns on primary and social infrastructure have increased by between 2 and 3 percent compared to previous years even though their underlying risks had not changed, he said in his presentation.