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Investor concerns on rising interest rates
07 October 2013
'End to easy money' in sight, says Allianz Global Investors
Allianz Global Investors
The effects of the end to the 'easy money' policy of QE and low interest rates in many developed markets is one of the top concerns facing institutional investors, according to a survey by Allianz Global Investors.
The asset manager found that while few investors expected interest rates to rise back towards long-term historical averages before 2015, some degree of interest rate and tail risk was seen as the most concerning risk factors over the next few years, with well over half seeing interest rates as a “great” or “considerable” risk. Similarly, almost two thirds of investors saw tail risk as a “great” or “considerable” issue.
Allianz found that investors are somewhat conflicted by policy responses to the financial crisis, realising that loose monetary policy has a “double-edged nature” in that it both stimulated short-term GDP growth, but also led to increases in inflation, systemic risk and had a negative impact on pensions.
The survey also found that 68% of investors believed monetary policies since the financial crisis increased the risk of abnormal price distortions in the fixed income market.
Elizabeth Corley, CEO of Allianz Global Investors, said: “Like the investors surveyed, we expect monetary policy to be accommodative for quite some time. Nevertheless, respondents are understandably already preparing for a world where interest rates increase from their historic lows.
“Bond holders are rightly concerned about capital losses when rates start to rise again as well as the inability to generate positive returns in the meantime. It is encouraging that investment in risk assets – equities – are seen as the most likely asset to pay off in the coming year.”
However, the survey also found investors were re-discovering their appetite for risk-taking, with 60% saying that they expected positive returns from equities over the next three years and average returns of around 6% expected.
Allianz also found greater regulation was a concern for investors, with over a quarter (27%) concerned that the political and regulatory environment will affect their ability to meet investment targets, and over half expecting policy to become less favourable in the next three years, with stricter government regulation, capital controls and new investment requirements being put in place. Overall, investors felt the average net effect of regulation was to reduce investment performance by 2.3%.