Inflation-linked indexes and products are making a comeback after volatility during the crisis kept many investors away, says Barclays Capital.
The inflation-linked bond market is expected to reach US$2 trillion in global issuance this year, according to the bank, with $200 billion of this coming from the US and European governments.
Last year, the structured product market for inflation products picked up and there is growing demand for inflation strategy indexes as investors look for transparency in their investments. Exchange-traded fund providers and institutional investors have increased their demand for transparency in the inflation markets. The bank specialists expect to see that demand for indexes grow, both for the benchmark and the strategy indexes, from investors looking for beta and those looking for alpha in the inflation markets.
Brazil is expected to produce $50 billion of inflation-linked bonds over the next year while Turkey has the largest issuance programme of the emerging markets economies. South Africa has also seen a large increase in issuance.
Inflation forecasts from Julian Callow, chief economist at Barclays in London, show inflation in the US will fall from 2.1% this year to 1.6% in 2011, while UK inflation will fall from 2.7% to 1.3%. India and China have much higher levels of inflation, at 7.4% and 3.5%, but the levels are expected to drop to 5.7 in India next year and remain constant in China.
Barclays experts remain optimistic about the US. They continue to think there will be green shoots of recovery especially as there is improvement in the US labour market. In their opinion they should be making up a lot of the ground lost as a result of the downturn. Europe is lagging as it is a weak environment and is tending to suppress inflation. Inflation in the UK is higher than expected due to the rise in import prices caused by the weakness of the pound. With expected tax rises after the upcoming general election expected to hit consumer goods, as has been seen in Spain, Greece and Finland, prices could rise further.