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Inflation and real estate top concerns among hedge fund and PE managers

Mutual fund, hedge fund and private equity managers fear the impact of inflation but are optimistic about the prospects for US and Asian equity markets over the next 12 months, according to survey data published by RBC Capital Markets.

The 102 asset management respondents, who manage a combined total of approximately USD4.1trn of assets, also project a slow global economic growth recovery and express scepticism about commercial real estate.

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 US Treasuries and 21 per cent to non-US 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.

The survey, conducted by the Economist Intelligence Unit, also found that 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). Sixty per cent expect inflation to be higher over the coming year.

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.

The majority of those surveyed (66 per cent) believe that US 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 US 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.

Marc Harris, co-head, global research, RBC Capital Markets, says: "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.”

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