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Inflation and Commercial Real Estate Top Concerns among
Mutual Fund, Hedge Fund and Private Equity Managers: RBC Capital
Markets Survey
Prospects for U.S. and Asian Equity Markets Rank High; Managers
Point to Currencies as Top Asset Class in Coming Year
LONDON, NEW YORK, TORONTO, July 12, 2010—
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 (RY on TSX and NYSE).
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 skepticism
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 and conducted by the Economist
Intelligence Unit.
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 skeptical 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.
Other key findings of the survey include:
- 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.
Commenting on the findings, Marc Harris, Co-Head, Global
Research, RBC Capital Markets, said: "Asset
managers are concerned about a demanding macro-economic environment
that could feature not only inflation but also slower-than-historic
growth during the next couple of years. Such an environment
would place a premium on the basics of identifying sound investments
amid uncertainty, managing higher levels of risk and adhering
to a disciplined, long-term strategy. In some respects, this
could prove just as challenging as the volatile markets we
saw two years ago, since sitting on the sidelines indefinitely
is not an option for many asset managers."
Adam Cole, Global Head of FX Strategy, RBC Capital
Markets, said: "Survey respondents felt that
all of the main asset classes became 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."
Additional findings from the survey include:
- Split views on US Treasuries and non-US sovereign debt
prices. Asset management and private equity firms surveyed
are split on future price movements for U.S. Treasuries,
with the largest number (39 per cent) saying they will go
down but significant numbers saying they will go up (28
per cent) or remain unchanged (27 per cent) over the next
12 months. Respondents are split on the direction that prices
of non-U.S. sovereign debt will take.
- Increased risk seen across asset classes. When
asked to evaluate how their perception of risk in specific
asset classes changed during the past year, the asset managers
surveyed said that the categories with the greatest increases
in perceived risk are equities (with 57 per cent saying
that they believe the asset class is riskier this year than
last), followed by currencies (56 per cent) and corporate
debt (51 per cent). The asset classes to which fewer respondents
assigned greater risk are hedge funds (38 per cent), commodities
(37 per cent) and private equity (40 per cent).
- Slow economic recovery. Nearly half of the asset
managers surveyed (44 per cent) expect that global economic
growth over the next two years will resume but at a pace
lower than during 2003-07, with an additional 39 per cent
expecting low but positive growth. Just 11 per cent expect
a prolonged period of economic weakness and five per cent
foresee growth at the same or higher levels than during
2003-07.
About the survey
RBC Capital Markets commissioned the Economist Intelligence
Unit to survey 440 senior executives from around the globe
(North America (34 per cent), Europe (41 per cent), Asia Pacific
(16 per cent) and Rest of the World (nine per cent), including
both clients and non-clients of the firm, on their outlook
for the future of capital markets. The survey was conducted
April 28-May 25, 2010. The respondents included 229 senior
executives from commercial and investment banks, hedge funds
and private equity firms and 211 executives from non-financial
companies active in the capital markets. A total of 102 asset
managers were surveyed, including executives and managers
from mutual funds and other registered investments, hedge
funds and private equity funds.
About RBC Capital Markets
RBC Capital Markets is the corporate and investment banking
arm of the Royal Bank of Canada and is active globally in
debt and equity origination, sales and trading, foreign exchange,
infrastructure finance, and structured products across a number
of industry sectors. Its North American platform includes
a significant U.S. investment banking franchise and leading
equity and fixed income underwriting, sales, trading and research
businesses.
- 30 -
RBC Contacts:
Beverley Weber,
+44 (0)20 7029 7685, Beverley.Weber@rbc.com
Kevin Foster,
+1 (212) 428-6902, Kevin.Foster@rbccm.com
1This finding reveals a shift
in perception from a previous RBC Capital Markets survey conducted
in the third quarter of 2009, in which the majority of the
respondents from the same demographic perceived deflation
to be a greater risk to their portfolio performance than inflation
(44 per cent for deflation vs. 37 per cent for inflation).
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