Risk perception on the rise: RBC report

However, the report says that 102 asset management respondents (mutual fund, hedge fund and private equity managers) are optimistic about the prospects for U.S. and Asian equity markets over the next 12 months.

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

Although the current scenario is potentially just as challenging as the volatile markets two years ago, Harris says sitting out is hardly an option for asset managers.

Commenting on the findings, Adam Cole, global head of FX Strategy, RBC Capital Markets, says: “Survey respondents felt that all of the main asset classes became riskier over the past year with currencies showing the largest increase.”

The report shows asset managers are becoming increasingly sensitive to their indirect currency exposure and to correlations between foreign exchange and other asset markets which require more active management.

“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,” says Cole.

While the Greek debt crisis led 38% respondents to choose currencies as the asset class they are most likely to increase their exposure to, another 37% chose equities and 35% commodities. U.S. Treasuries and non-U.S. sovereign debt were the least likely to attract increased allocation over the coming year, at 17% and 21% respectively.

Reduced allocation to U.S. Treasuries could well be reflecting a return of confidence after the recent spate of market volatility. U.S. Treasuries remain the first place many investors go when they are putting on the flight to quality trade.

Returning to the gloomy risk outlook, skepticism about commercial real estate as an asset class pervaded all the participating markets. Forty-six per cent of asset managers surveyed say that commercial real estate risk is higher this year than last. Just one-quarter (24%) plan to increase their allocation to commercial real estate in the coming year.

A substantial majority of those surveyed believe that prospects for U.S. and Asian equity markets are sound. Sixty-six per cent said U.S. equity markets will improve in the year ahead, although 57% say risks associated with equities in general is higher this year compared to last.

Asian equity markets will rise over the next year, according to 69% of respondents, while, 40% expect European equity markets to decline over the next 12 months.

Respondents are split on the direction of the prices of U.S. Treasuries. While 39% of all asset management and private equity firms surveyed say they will go down over the next year, 28% expect them to rise.

Increased risk is seen across all asset classes, with 57% saying equities would become more risky and 56% saying currencies would as well. Fifty-one percent said corporate debt was becoming riskier than it was last year. Fewer respondents associated greater risk with hedge funds (38%), commodities (37%) and private equity (40%).

This risk outlook is shared by many financial experts in various economies around the world. Their advice to investors is to stay invested and exposed to a range of assets classes.

“Stay invested in a range of asset classes if you want to reduce risk at times when volatility picks up,” says London (U.K.)-based Trevor Greetham, asset allocation director, Fidelity International Limited.

(07/12/2010)