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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 This 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). . 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.

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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).