Mutual fund, hedge fund and private equity managers fear the impact of inflation but are optimistic about the prospects for U.S. and Asian equity markets over the next 12 months, according to survey data published today by RBC Capital Markets, the corporate and investment banking arm of Royal Bank of Canada.
The 102 asset management respondents, who manage a combined total of approximately US$4.1 trillion of assets, also project a slow global economic growth recovery and express scepticism about commercial real estate.
This unreleased data was compiled as part of a larger study of 440 senior corporate and finance executives worldwide, commissioned by RBC Capital Markets.
Asset allocation. Thirty-eight per cent of respondents selected currencies as the asset class they are most likely to increase in light of the sovereign debt crisis, 37 per cent chose equities and 35 per cent commodities. Perhaps reflecting concerns over levels of government borrowing, just 17 per cent plan to increase their allocations to U.S. Treasuries and 21 per cent to non-U.S. sovereign debt over the coming year.
The asset managers surveyed say they are sceptical about commercial real estate in their own markets, with 46 per cent of those surveyed saying that commercial real estate risk is higher this year than last. Just one-quarter (24 per cent) plan to increase their allocation to commercial real estate in the coming year.
Among other key findings of the survey, conducted by the Economist Intelligence Unit:
Inflation remains a top concern. The debate on inflation versus deflation rages on, with 45 per cent of respondents saying that inflation poses a greater threat to portfolio performance than deflation (chosen by 34 per cent)[1]. Sixty per cent expect inflation to be higher over the coming year.
Commercial real estate risks seen. When asked how their perception of risk has changed in their markets over the past year, 46 per cent of those surveyed said that commercial real estate risk is higher or much higher. Notably, 66 per cent of private equity investors say that commercial real estate risk is higher, the highest risk perception across this asset class.
U.S. and Asian equity markets projected higher, European equity markets mixed. The majority of those surveyed (66 per cent) believe that U.S. equity markets will improve in the year ahead, with 19 per cent believing they will go lower and 14 per cent expecting no change. Although most of those surveyed believe the U.S. equity markets will go higher this year, 57 per cent said that the risk associated with equities in general is higher this year compared to last. A substantial majority (69 per cent) of those surveyed also believe that Asian equity markets will rise over the next 12 months, but only 38 per cent expect European equity markets to rise. Forty per cent expect European equity markets to decline over the next 12 months.
Adam Cole, Global Head of FX Strategy, RBC Capital Markets, said: “Survey respondents felt that all of the main asset classes had become riskier over the past year with currencies showing the largest increase. Despite this, currencies are amongst the top beneficiaries in terms of volumes of allocation by asset managers due to their extremely high liquidity and hedging potential. We are also seeing asset managers becoming increasingly sensitive to their indirect currency exposure and to correlations between FX and other asset markets which require more active management.”
D.C.