Cautious optimism about sovereign debt and U.S. relative strength
Asset management, private equity and hedge fund executives expect growth over the next year to come from smaller Asian economies such as Hong Kong, Singapore and South Korea, according to a study commissioned by RBC Capital Markets, the corporate and investment banking arm of the Royal Bank of Canada, and conducted by the Economist Intelligence Unit.
The 108 asset management respondents were part of a larger study of 461 senior corporate and finance executives worldwide. Among the survey’s findings:
Asset allocation shifts: In a sign that asset managers have adapted to the impact of the sovereign debt crisis in their portfolios, the survey reveals a significant shift in expectations since a similar survey conducted in May 2010. Namely:
- Asset managers are optimistic about Asian equity markets, with 69 percent expecting a rally over the next year.
- Asset managers are more optimistic about the performance of European equity markets (only 26 percent expect the markets to fall, a significant shift from the 40 percent who expressed this in the previous survey) and the Euro (30 percent expect a higher valuation, versus 16 percent in the previous survey).
- Asset managers are more optimistic about seeing a reduction in inflation in their own countries over the coming year (18 percent expect it, versus seven percent in the previous survey).
- Asset managers are less optimistic about the U.S. equity markets (54 percent expect gains, versus 66 in the previous survey) and the dollar (53 percent expect a devaluation, versus 24 percent in the previous survey).
“The dramatic swings in sentiment captured by the RBC survey illustrate the ongoing volatility and complexity of economies and financial markets. Asset managers and investors are needing to be increasingly discriminating in their portfolio allocation, taking a more nuanced approach to investing, looking for alternative indicators and conducting appropriate analysis and risk management,” said Richard E. Talbot, co-head, Global Research, RBC Capital Markets.
Emerging markets leading global growth: Nearly three-in-four respondents (73 percent) say the smaller Asian economies have better prospects for growth in the next year compared to the year just past, followed by India (66 percent) and China (65 percent). Russia (51 percent) leads the second pack, followed by Africa (44 percent), Europe (43 percent), North America (42 percent) and Japan (27 percent).
“Emerging markets have led global growth for the past several years, and asset managers around the world believe they will continue to do so. However, it is quite surprising that asset managers see smaller Asian economies surpassing China and India in terms of growth prospects,” said Marc Harris, co-head, Global Research, RBC Capital Markets. “The emerging markets are more diversified than ever and are growing at different rates. Investors are recognizing the need to look beyond the four traditional emerging markets and are now looking to intra-regional differences in search for yield.”
Cautiously optimistic about sovereign debt: The asset managers surveyed are cautiously optimistic about the sovereign debt issues affecting Europe. More than half (53 percent) expect their own government will not experience a funding shortfall during the next one to three budget cycles or will be able to easily finance the shortfall.
Concerns remain, however, as one-in-five (21 percent) think their country’s debt capacity is already under pressure, four percent think it will come under pressure in the coming year, and 30 percent expect it will come under pressure during the next three years.
U.S. maintains its relative strength: The U.S. is largely sheltered from such worries. More than three-in-four (77 percent) expect that the U.S. dollar will remain the dominant global reserve currency over the next three years, although that number drops to 49 percent looking out five years. Five years out, 20 percent expect the euro to dominate, with 12 percent favoring the Chinese renminbi. Only 36 percent think there is a greater than 20 percent chance that oil will be priced in a currency other than dollars within the next three years.
However, seven-in-10 (68 percent) say that foreign holders of U.S. debt will face losses over the next three years, mainly due to higher interest rates or a perceived deterioration of credit quality. Slightly offsetting their concern for losses, 69 percent say that the U.S. can tolerate higher levels of debt than other countries without having its solvency called into question.
About the survey
RBC Capital Markets commissioned the Economist Intelligence Unit to survey 461 senior executives from around the globe (North America [38 percent], Western Europe [38 percent], Asia Pacific [14 percent] and Rest of the World [nine percent]), including both clients and non-clients of the firm, on their outlook for the future of capital markets. The survey was completed in January 2011. The respondents included 211 senior executives from commercial and investment banks, hedge funds, asset managers, pension funds, sovereign wealth funds, institutional investors and private equity firms and 250 executives from non-financial companies active in the global capital markets.
About RBC Capital Markets
RBC Capital Markets is the corporate and investment banking arm of RBC and is consistently ranked among the top 15 investment banks globally. With over 6,000 employees, RBC Capital Markets is active globally in fixed income, foreign exchange, infrastructure finance, ECM, metals, mining and energy. Working with clients through operations in Asia and Australasia, the UK and Europe and in every major North American city, RBC Capital Markets provides products and services from 75 offices in 15 countries. For more information, please visit www.rbccm.com.
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