Fear of Downside Risks Prevents Investments in Financial Markets

These are uncertain and ambiguous times for investors. In a global survey of 800 institutional investors and corporate executives, 86 percent agree that there are significant opportunities for growth in financial markets. But among that group, 58 percent say that there are major downside risks that are preventing them from taking advantage of those opportunities. In other words, fear for the future and conflicting indicators about the economic and market outlook are leading to a near-paralysis among a large proportion of the investor base.

 

"The Search for Growth: Opportunities and Risk in Financial Markets," an Economist Intelligence Unit report and sponsored by BNY Mellon, finds that emerging markets offer the best prospects, although there are concerns about overheating. Investors think that emerging markets will continue to offer the best outlook for economic and asset-price growth. Emerging market equities are seen as the asset class with the best prospects, and three of the BRICs (Brazil, India and China) top the list of countries seen as offering the best opportunities for growth. But there are also concerns that investors could be over-relying on emerging markets. Two-thirds think that emerging market assets offer strong growth potential, but are concerned that some markets could be overheating, and almost half agree that investors are pinning too much hope on emerging markets.

 

Growth is expected to continue but at a slower pace, says the report. The consensus among survey respondents is that the global economic recovery will continue. But there is disagreement over the pace of that improvement. Just under one-quarter think that the recovery will pick up momentum over the next 12 months, but almost half say that the pace of recovery will slow over that timeframe. This is likely to reflect concerns about recent shocks, including the political unrest in the Middle East and the earthquake in Japan, as well as fears about rising inflation, particularly in emerging markets.

 

The report adds that commodities offer good growth prospects, but will be a risky asset class. Commodities are seen as second only to emerging-market equities in offering the best opportunities for investment growth over the next 12 months. Industries involving the production of commodities, such as oil and gas; agriculture and agribusiness; and mining and metals, are also the sectors seen as offering the best potential. But again, there are concerns about overheating. Asked which asset class is most likely to be the source of the next price bubble, respondents point to commodities. They also consider that commodities will be the asset class where levels of risk are most likely to increase over the next 12 months.

 

According to the report, concerns abound about the Eurozone, although monetary union should withstand the shock. The majority of investors questioned for this report agree that default of a Eurozone country is looking increasingly likely, although few expect that this will ultimately lead to the break-up of the monetary union. Investors, for the most part, are steering clear of the peripheral markets.

 

A common theme from the survey is a lack of confidence in multilateral decision-making. Only a small minority of investors expect progress on concluding the Doha round of trade negotiations, while there are similarly low expectations for agreement on a global accord to replace the Kyoto Protocol, or a globally agreed solution to the “too-big-to-fail” problem in banking.

 

 

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