GLOBAL - Institutional investment managers expect global inflation to increase and interest rates to rise in the coming months, research by Northern Trust suggests.
A survey of 97 institutional managers during the fourth quarter of 2010 showed 62% of managers believe global inflation will rise over the next six months, up 40 percentage points from the third quarter survey and the highest level recorded since Northern Trust began its survey in the fourth quarter of 2008.
Meanwhile, more than half (53%) of managers believe interest rates will rise over the next three months, up from 20% in the third quarter of 2010 and again the highest level recorded since the survey's inception.
Inflation concerns are likely related to increased optimism regarding the economy and financial markets, said Northern Trust. Some 55% of investment managers surveyed expect global growth to accelerate over the next six months, up from 33% who held this view in the third quarter. Some 80% of respondents expect corporate earnings to rise in the next three months.
"In the fourth quarter our managers expressed optimism that global markets are on solid footing and will perhaps continue their upward trajectory," said Chris Vella, global director of research for Northern Trust Global Advisors (NTGA), the multi-manager arm of Northern Trust.
"As we might expect, however, with growth comes the risk of increased inflationary pressure and the potential for rising interest rates. It appears that our managers have also sounded a note of caution around these two important measures."
Managers also remained positive regarding market valuations, with the majority of managers (58%) believing the US equity market, as measured by the S&P 500 Index, was undervalued. Select areas of international markets were also seen to be attractive, with 55% of managers feeling Japanese equities were undervalued.
The biggest shift in valuation sentiment was in emerging market equities, where 39% of managers believed the segment was undervalued, a significant decrease from the 59% who held this view in the third quarter.
"Our managers are continuing to find investment opportunities throughout the US and international markets," said Harry Phinney, NTGA investment analyst.
"However, with regard to emerging market equities, it appears that the recent strong relative performance in the segment may be boosting valuations to levels that our managers feel are somewhat less compelling when compared to other markets."
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