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Dale Jackson

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Fighting the invisible enemy

Dale Jackson

Bob Tebbutt maintains G7 central banks are in cahoots when it comes to pricing the world's major currencies. To avoid a widespread global recession in the early part of the decade he contends they agreed to let the Fed take the lead on lowering interest rates to drive the greenback to its pathetic lows and stimulate exports. Now, he say's central bankers are changing direction to boost the U.S. dollar by raising rates — and that could trigger inflation.

"Right now it appears that the Federal Reserve in the states wants the U.S. dollar to be a little bit stronger and they're going to raise rates" he says. "That's what I believe and I'll stick with it."

As vice-president of risk management with Peregrine Financial Mr. Tebbutt's job is to steer the investment portfolios of institutional clients away from potential trouble - and right now trouble is looking more and more like inflation.

His hedge tools are commodities and currencies and his inflation-fighting weapon of choice is gold, which is known for retaining its value in inflationary times.

There is, however, one problem: he's not absolutely convinced the enemy exists. Trading at about $900, bullion could be at a peak if inflation is tame and the global economy holds steady or slips into recession.

Mr. Tebbutt is not alone in his doubts. Several money managers see the signs of inflation in the form of high food and energy prices, along with rising consumer prices in developing economies like China and India. But they aren't so sure high prices will trickle over to the broader economy.

To add to their dilemma, the threat of inflation eliminates the option of cash as a safe haven. Cash is no longer king when prices are rising. One dollar becomes 95 cents if inflation hits 5 per cent. It's the same story for fixed-yield bonds.

Their challenge is to hedge against inflation without missing out on growth opportunities on global equity markets — and they're doing it in interesting ways.

Take, for instance, Mark Grammer. As vice-president of investments to Toronto-based Mackenzie Financial, he tries to inflation-proof his $86-million Mackenzie Universal Global Growth Class fund with technology companies that have relatively low costs. By his thinking, costs would remain low in relation to increases in the price of their products.

He also holds companies that benefit directly from operations that can easily pass along cost increases to its customers such as British-based supermarket giant Tesco PLC. "I have exposure to companies that are beneficiaries of inflation" he says.

For similar reasons Chief investment officer with New York-based Blue Marble Research, Vinny Catalano rides the potential inflation wave through a global consumer staples exchange traded fund (ETF), which trades on the American Stock Exchange under the symbol KXI.

Consumer staples stocks include manufacturers and distributors of food, non-durable household goods and drug companies. You can find the best examples of consumer staples, and their rising prices, by looking at the receipt from your local grocery store.

Some big-name consumer staples companies include Procter & Gamble, Nestle, Wal-Mart, Pepsico, Kraft Foods and Colgate-Palmolive.

Rodger Nisbet of Edinburgh-based Walter Scott and Partners has a few interesting inflation hedges in his $73-million Renaissance International Equity fund. His investment model is designed to cushion inflationary shocks by selecting dividend-paying firms with operating margins above 20 per cent that can sustain cash flow. He avoids companies that have a lot of cash tied up in their working capital and inventories. "The way we invest leads us to companies that are not immune to inflation, but are better placed" he says.

Mr. Nisbet is what you might call an inflation vigilante. His investment model always factors in a global inflation rate of 5 per cent.

Perhaps his most interesting hedge right now is his fund's 42 per cent weighting in Japan. He looks at the entire country as a growth story with an inflation cushion. The Japanese have historically been notorious savers. Over the past few years the country has actually been experiencing deflation — adding a further incentive for consumers to keep their money in the bank and wait to buy big-ticket items at lower prices.

Now, even the lacklustre Japanese economy is feeling the effects of outside inflation. He figures the prospect of higher prices is enough to get consumers spending. "It's not the fastest growing economy in the world, but it's robust" he says.

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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