FYI | Mar 22 2011
– Barclays survey shows few expect Goldilocks scenario will continue
– Inflation starting to emerge as a concern
– China most underpriced risk in financial markets currently
– Commodities seen as best performing asset class over next quarter
By Chris Shaw
Barclays Capital has surveyed more than 1,000 institutional clients as part of its quarterly Global Macro Survey, the results giving some interesting insights into how the institutional (savvy?) part of the global investor community sees markets at present.
The survey shows only 7% of investors continue to expect the so-called 'Goldilocks' scenario of a growth recovery and easy monetary and fiscal policies will continue. This in part reflects a faint increase in inflationary concerns for investors.
Barclays notes the general view is any pick-up in inflation will be modest, so allowing the Federal Reserve to hold off on tightening rates aggressively. Almost 80% of those responding to the survey think inflation won't be significant enough to affect Fed policy, while a similar proportion see no policy tightening in the US this year.
Assuming a 'Goldilocks' scenario cannot be sustained, Barclays sees a number of alternatives, one being an increase in both commodity prices and inflation on the back of robust global economic growth. The other is the less pleasing combination of lower growth and higher inflation, likely resulting from either political issues in the MENA region or supply side shocks stemming from any upheaval.
According to the survey, the most underpriced risk in financial markets at present is not MENA but a hard landing in China, largely because this possibility has been getting less attention of late. As well, Barclays notes despite awareness in the market of downside risks to Chinese growth, forecasts have yet to be revised downwards.
Only 2% of investors responding to the survey see the current European debt problems ending up as a large-scale crisis that could include the break-up of the euro. As Barclays points out, this is down from 4% voicing this concern in the survey last December.
Looking more closely at the survey results, Barclays notes 41% of respondents expect commodities will be the best performing asset class over the next quarter, following by 31% favouring equities and 12% voting for government bonds.
With 2011 to date seeing a shift in equity fund flows to developed markets from developing markets the question of how long is this trend expected to continue has emerged. Barclays notes 30% of respondents expect this trend will continue until the European Central Bank (ECB) tightens policy and the Fed starts its exit strategy from Quantitative Easing (QE).
In contrast, 27% of respondents view monetary policy risks as overstated, which suggests emerging market equities will resume outperformance in the short-term. This compares to 24% who expect emerging markets will continue to underperform until these markets are cheaper on a forward earnings multiple basis than developed markets.
In terms of best performance over the next one-to-two quarters, the survey showed energy is the top pick from 43% of those surveyed, following by defensive sectors at 23%, materials at 17% and consumer discretionary and financials also at 17%.
An oil price shock is seen as the biggest risk to the developed equity market rally according to 43% of those responding, while public sector debt and/or rising debt costs and changes in monetary policy are seen as a major risk by 17% of respondents in both cases. Slowing earnings growth was the major concern of only 15% of respondents.
Expectations for returns for developed world equities in 2011 show 55% of investors responding see returns of 5-10%, while 27% are expecting returns of greater than 10% and 11% see flat market returns over the course of 2011.
For interest rates, 41% of those responding take the view enough is priced in at present in terms of expectations for a rate tightening by both the ECB and the Bank of England (BoE). Economic fundamentals don't yet justify a tightening according to 22% of respondents, while 18% see enough being priced in for the ECB but not enough for the BoE.
Just more than half of respondents expect the Fed will keep interest rates on hold over the course of 2011, while 21% expect QE will be unwound before there is any increase in interest rates. 15% of those surveyed expect one 25-basis point rate hike by the Fed this year.
In foreign exchange, Barclays notes 23% of those surveyed see the greatest potential for forex upside as a result of monetary policy tightening lying with the British pound, followed by 20% favouring the euro. The survey shows 17% see tightening as already being discounted in the market.
With respect to the yen, 45% of those surveyed suggest staying out of that market at present, while 28% see potential to trade the currency's recent range. G10 commodity currencies are regarded as offering the best risk-reward over the next quarter by 36% of those surveyed, compared to 23% favouring Asian emerging market currencies and 17% the safe haven currencies of the yen, the US Dollar and the Swiss franc.
To position for a further spike in oil prices, 30% of investors in the survey suggested buying volatility in forex markets, while 24% indicated buying G10 oil currencies was the preferred approach.
Looking generally at emerging markets (EM), the Barclays survey showed 43% of respondents expect equities will be the best-performing emerging market asset class over the next three months, followed by forex at 26% of respondents and corporate credit at 16%.
Commodity prices shocks and inflation are seen as the biggest downside risk to EM asset markets in the next quarter by a little more than half of those surveyed, while 29% see a significant slowdown in China as the major risk.
Year-to-date EM equity market underperformance has largely played out according to 45% of those responding, while 27% see this underperformance as a reflection of monetary policy tightening. This suggests a continuation of the trend for as long as emerging market economies are tightening and industrial economies are not.
While global demand for EM commodity currencies is strong these currencies are fully valued according to 34% of those surveyed, while 22% remain positive on EM commodity currencies due to strong demand and a further 18% expect further gains because of existing easy money conditions globally.
