by Philip Haddon on Jul 01, 2010 at 08:01

Former Goldman Sachs global equity strategist, Dr Sushil Wadhwani, has warned of deflation in the near term which will lead to inflation over the next five to seven years.

Wadhwani founded Wadhwani Asset Management and was a full time member of the Monetary Policy Committee at the Bank of England from 1999-2002. He told investors at a Newcits conference in London, organised by Ucits Hedge, a Hedge Fund Journal publication, ‘there are considerable downside risks over the next two years.’

He runs the GAM Star Keynes Quantitative Strategies fund, a systematic macro Newcits fund, and thinks deflation is the most pressing threat to the global economy in the near term.

‘At some point deficits get so big that governments cannot aim for price stability. We are one recession away from Japan-style deflation,’ he said.

‘With all the fiscal tightening occurring, on a two year view the risks are weighted very much towards deflation. This fiscal tightening will become self-defeating and will lead to bigger deficits, and thus, eventually, inflation over the next five to seven years.’

He told the gathered Ucits Hedge fund investors ‘this ‘very significant degree of macro uncertainty makes alternative strategies more attractive than traditional.’

Wadhwani’s GAM Star Keynes Quantitative Strategies fund was launched at the beginning of April and has so far returned 2.73% up to the end of June.