How to invest for an inflationary end game

The indefinite suspension of National Savings & Investments (NS&I) Index-Linked saving certificates earlier this week has irritated savers. And for very good reason. Without them there is absolutely no way to earn a real return on cash without taking a certain amount of risk.

But the disappearance of the most attractive product on the market is not the only worrying thing about the suspension. It isn't entirely clear why NS&I decided to withdraw the products.

The press release says that NS&I was getting in more money in deposits than the government had asked of it. But, given the government's current funding requirements, it is hard to see how the Treasury could dare to dream of having too much money particularly sticky money of the kind they get via NS&I.

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Savers into these kind of certificates might have been more expensive than gilt buyers but they can usually be relied upon to roll their deposits over. There is no such certainty when it comes to global bond investors.

So if it isn't that, then what is it? The general consensus among the cynics is that the suspension has been prompted by the persistent rises in UK prices. It might be that NS&I isn't buying the Bank of England's view that high inflation is temporary, and is keen to cut its future costs either by cutting the inflation link embedded in some of its products completely or by linking to the Consumer Price Index rather than the Retail Price Index, given that the latter has long been lower. If I were in charge of NS&I, I reckon I'd be thinking along the same lines.

But the Bank of England appears to have lost interest in inflation risk and refocused on growth (or rather the utter lack of growth) in the UK. Last month, there was no mention of easing monetary policy in the minutes of the committee's meeting. This month, however believing that prospects for GDP growth had "probably deteriorated" the committee "considered arguments in favour of a modest easing in the stance of monetary policy."

It is ominous stuff. Until recently, most strategists were pretty convinced that quantitative easing (QE) was an emergency measure we wouldn't be using again in this cycle. That is no longer a reasonable position to hold: the MPC rejected QE this time around but, as austerity starts to bite at our already barely there recovery, it's hard to imagine they won't be discussing it again next month.

And when they go ahead with it which I think they will feel they have to it is hard to imagine they will be doing so alone. Not at a time when Ben Bernanke is on record as considering the prospects for the US economy to be "unusually uncertain." He's a worried man.

For the past decade, worried central bankers have always done the same thing: eased monetary policy. That used to mean cutting interest rates but, now they can be cut no further, it can only mean more QE.

Our monetary authorities might think that our economies are so riddled with deflationary influences that QE brings no inflation risk with it, and they are right in the short term. But, at some point, doing it in volume will bring inflation.

Without NS&I savings certificates, that leaves investors in a very tricky situation even index linked gilts leave your capital at some risk. So what do you do? You hold gold of course. You hold some equities in businesses with good brands and pricing power. And maybe you take a look at some property. Not UK property, given its ongoing bubble status. But perhaps German property.

CLSA's Chris Wood notes that residential prices in Germany have suddenly started to rise as a loss of confidence in the euro, combined with the high yield on offer relative to deposit rates, has pushed German investors into the property market.

This is worth noting, partly because German property isn't expensive on any criteria and partly because, were Germany somehow to exit the euro in the wake of the ongoing sovereign debt crisis (it isn't impossible), holding hard German assets denominated in German backed currency would probably turn out to be a good thing for those looking to maintain the real value of their assets.

The problem is how to invest in it without actually having to go to Berlin and buy a flat in person. There are leveraged funds listed but they are risky bets. Investors have, for example, had a horrible time with the likes of Aim-listed Speymill Deutsche, which owns apartments across Germany's cities: it is now trading at an 80 per cent discount to its net assets and in need of refinancing.

That doesn't make it quite the same kind of investment as a few NS&I index linked saving certificates. Fingers crossed they reintroduce the latter before the QE really kicks off.

This article was first published in the Financial Times