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The searchfor growthOpportunities and risks forinstitutional investors in 2012A report from the Economist Intelligence Uni...
The Search for Growth Opportunities and risks for institutional investors in 2012           Contents        About this rep...
The Search for Growth Opportunities and risks for institutional investors in 2012                About this               ...
The Search for Growth Opportunities and risks for institutional investors in 2012                          Executive      ...
The Search for Growth Opportunities and risks for institutional investors in 2012    l Low levels of capital investment te...
The Search for Growth Opportunities and risks for institutional investors in 2012    Scenario analysis    This chart shows...
The Search for Growth Opportunities and risks for institutional investors in 2012                             Introduction...
The Search for Growth Opportunities and risks for institutional investors in 2012                           1             ...
The Search for Growth Opportunities and risks for institutional investors in 2012 Q       Over the next twelve months, do ...
The Search for Growth Opportunities and risks for institutional investors in 2012                             2           ...
The Search for Growth Opportunities and risks for institutional investors in 2012                              The euro zo...
The Search for Growth Opportunities and risks for institutional investors in 2012                              LTRO has bo...
The Search for Growth Opportunities and risks for institutional investors in 2012                              3          ...
The Search for Growth Opportunities and risks for institutional investors in 2012                        keep rising at a ...
The Search for Growth Opportunities and risks for institutional investors in 2012                                    4    ...
The Search for Growth Opportunities and risks for institutional investors in 2012Some see the          The EIU forecasts U...
The Search for Growth Opportunities and risks for institutional investors in 2012                             5           ...
The Search for Growth Opportunities and risks for institutional investors in 2012Q     In your view, where is the next ass...
The Search for Growth Opportunities and risks for institutional investors in 2012 China: Broadly optimistic China has cont...
The Search for Growth Opportunities and risks for institutional investors in 2012 Asia and Latin America: New focus on sma...
The Search for Growth Opportunities and risks for institutional investors in 2012                                   6     ...
The Search for Growth Opportunities and risks for institutional investors in 2012                             economies an...
The search for growth: Opportunities and risks for institutional investors in 2012
The search for growth: Opportunities and risks for institutional investors in 2012
The search for growth: Opportunities and risks for institutional investors in 2012
The search for growth: Opportunities and risks for institutional investors in 2012
The search for growth: Opportunities and risks for institutional investors in 2012
The search for growth: Opportunities and risks for institutional investors in 2012
The search for growth: Opportunities and risks for institutional investors in 2012
The search for growth: Opportunities and risks for institutional investors in 2012
The search for growth: Opportunities and risks for institutional investors in 2012
The search for growth: Opportunities and risks for institutional investors in 2012
The search for growth: Opportunities and risks for institutional investors in 2012
The search for growth: Opportunities and risks for institutional investors in 2012
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The search for growth: Opportunities and risks for institutional investors in 2012

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The search for growth is the second annual report produced by the Economist Intelligence Unit, and sponsored by BNY Mellon. The research aims to paint a picture of the global economy and the investment market in 2012, and to explore where investors are looking for growth opportunities in today’s tepid market environment. The report is part of an annual series and builds on the findings of last year’s survey and reports.

The report was written by Eric Laursen and edited by Annabel Symington. The research is based on two main initiatives. In January 2012 the Economist Intelligence Unit conducted a survey of nearly 800 institutional investors and corporate executives. The respondents were drawn from 77 countries.

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The search for growth: Opportunities and risks for institutional investors in 2012

  1. 1. The searchfor growthOpportunities and risks forinstitutional investors in 2012A report from the Economist Intelligence Unit Sponsored by
  2. 2. The Search for Growth Opportunities and risks for institutional investors in 2012 Contents About this report 2 Executive summary 3 Introduction 6 1 Global economic outlook: Tempered optimism after 7 a roller-coaster year 2 The European dilemma 9 Sovereign debt anxieties: The next bubble 11 3 Geopolitics: The threat to oil prices 12 Moving away from commodities 13 4 2 The US: Risk/reward target 14 5 Emerging markets: Supporting the global economy 16 China: Broadly optimistic 18 Asia and Latin America: New focus on smaller markets 19 6 Monetary policy, inflation and interest rates 20 7 Conclusion: Breakthroughs and positive surprises? 22 Appendix: Survey results 231 © The Economist Intelligence Unit Limited 2012
  3. 3. The Search for Growth Opportunities and risks for institutional investors in 2012 About this report The search for growth is the second annual report l Patrice Conxicoeur, managing director, global produced by the Economist Intelligence Unit, and insurance coverage, HSBC Asset Management (Hong sponsored by BNY Mellon. The research explores the Kong) Ltd. global investment environment that is unfolding in l Antje Engelhardt Correa, international project 2012, and asks where investors are looking for growth finance and investment manager, Enercon GmbH, Germany opportunities in today’s tepid market environment. l Ricardo L. Cortez, president, global distribution, The report is part of an annual series and builds on Broadmark Asset Management, US the findings of last year’s survey and reports. The l James Davis, VP, strategy and asset mix, Ontario Economist Intelligence Unit bears sole responsibility Teachers Pension Plan, Canada for the content and the findings, and the views l David Fan, portfolio manager, CBRE Clarion expressed do not necessarily reflect those of the Securities, Japan sponsor. The report was written by Eric Laursen and l Elvia George, CFO, Bank of Valletta Group, Malta edited by Annabel Symington. l Stephen Gillmore, head of strategy, The Future Fund, The research is based on two main initiatives. Australia In January 2012 the Economist Intelligence Unit l Philip Halperin, chief risk officer, Alfa-Bank, Russia conducted a survey of nearly 800 institutional investors l Esteban Jadresic, chief economist and global and corporate executives. The respondents were drawn investment strategist, Moneda Asset Management, Chile from 77 countries. To complement the survey results, the l Andrejs Landsmanis, head of strategic asset Economist Intelligence Unit carried out a series of in- allocation, Första AP-fonden, Sweden depth interviews with leading global pension sponsors, l Andre Matsushima Teixeira, founder and managing non-profit portfolio managers, economists and private director, Brasil Beneficios Corretora de Seguros, equity and hedge fund managers. The insights from Brazil many of these interviews appear throughout the report. l Peter Pontikis, investment specialist, ANZ Private While not everyone interviewed is quoted in the report, Bank, Australia the Economist Intelligence Unit would like to thank l Charles Robertson, global chief economist, everyone for their valuable contribution. Renaissance Capital, UK l Steffen Bassler, director, Credit Suisse Securities l Jaya Shankar, executive director, HDIL Securities Ltd, (Europe) Ltd, UK India l Prasant Bhansaali, director, Mehta Equities Ltd, India l Michael Strauss, chief investment strategist and chief l Brad Cann, SVP-business development, Horizons economist, Commonfund, US Exchange Traded Funds, Canada l Michael Taylor, CEO, London Pensions Fund l Tze Hoe Chan, director, Zendo Holdings, Singapore Authority, UK l David Chapman, director of risk management, l Ben Whitmore, manager, Jupiter Special Situations Catholic Healthcare Investment Management Fund (Unit Trust), Jupiter Investment Management Company, US Group, UK2 © The Economist Intelligence Unit Limited 2012
  4. 4. The Search for Growth Opportunities and risks for institutional investors in 2012 Executive summary Global investors surveyed in January expressed Notable conclusions from the research include: tempered optimism about growth prospects over the next 12 months. Some stabilisation of the l Investors see some opportunities in global European debt markets following the European financial markets. Among survey respondents, Central Bank’s (ECB) provision of cheap loans to 85% perceive significant opportunities, although the banks is buying time for EU member states to 51% acknowledge that there are major downside engineer an economic recovery, while signs of a risks. Some easing of the European debt crisis, modest improvement in the US and the relative coupled with a somewhat better economic resilience of emerging markets to a global performance in the US, has created a more stable slowdown provide further support to investor outlook for financial markets.Positive forces sentiment.could take hold, Opinions among survey respondents and l Geopolitics rather than market forces willbringing more interviewees vary widely according to region— govern the outcome in 2012. Hopes for furtheropportunities unsurprisingly given the dramatically different improvement hinge less on economic activity growth prospects of emerging Asian and euro zone generated by the private sector than onthan investors countries. Most investors agree in their overall governments’ ability to play their geopolitical rolesdare hope for assessment. However, geopolitical concerns will properly. The threat of an oil price spike, tied intoday. evolve over the course of the year, and likewise, part to tensions over Iran’s nuclear programme, is positive forces could take hold, bringing more the main risk to the global recovery. However, opportunities than investors dare hope for today. recent events in Spain may see the future of the The search for growth is the second annual report single currency union retake the top spot. produced by the Economist Intelligence Unit, and sponsored by BNY Mellon. The research aims to l High levels of debt continue to be a major paint a picture of the global economy and the concern. Over the next 12 months debt levels are investment market in 2012, and to explore where unlikely to change, but debt continues to restrict investors are looking for growth opportunities in the world economy’s recovery from the 2008 global today’s tepid market environment. The report is economic crisis. part of an annual series and builds on the findings of last year’s survey and reports.3 © The Economist Intelligence Unit Limited 2012
  5. 5. The Search for Growth Opportunities and risks for institutional investors in 2012 l Low levels of capital investment temper l European investors are more optimistic than opportunities. Less than half (45%) of the global aggregate about the euro zone’s respondents think that businesses will increase future. Almost half (47%) of survey respondents capital investment in 2012. Respondents from the agree that an austerity plan is likely to collapse in US, where the economy is slowly improving, appear one or more peripheral euro zone countries, slightly more optimistic. prompting the exit of one or more in the next 12 months. But less than one-third (29%) of European l The US finds favour as stable middle ground. investors think this scenario is likely. With GDP forecast to grow modestly, investors now see the US as offering an attractive risk/reward l Investors move away from commodities. trade-off. In this year’s survey the US moves from Lower demand for many raw materials from fourth to third place for asset price growth, with sluggish developed markets in the euro zone and 40% of respondents placing it among their top elsewhere is pushing investors away from three markets. commodities. Another reason, according to some investors, may be a desire by large institutions to l Slower growth in China and India shifts concentrate on highly liquid assets during a time of attention to smaller emerging economies. uncertainty. Smaller economies are likely to benefit from demographic trends—such as relatively young populations—as well as economic or political factors such as low wage costs, low public and private debt levels, rising domestic consumption and deepening financial markets. South-east Asia, in particular, is attracting investor attention, replacing Brazil in fifth position among markets offering the best opportunities for asset price growth this year.4 © The Economist Intelligence Unit Limited 2012
  6. 6. The Search for Growth Opportunities and risks for institutional investors in 2012 Scenario analysis This chart shows respondents’ assessment of the likelihood and impact of a range of scenarios LIKELIHOOD IMPACT on their portfolio or company along two vertical axes. (% of respondents, High likelihood Low likelihood (% of respondents, likelihood of scenarios, High Impact Low Impact impact of scenarios, quite likely and very likely) negative and positive) 87.6 A string of last-minute and short-term budget deals in the US breeds market uncertainty 65.0 Assads regime in Syria falls 64.5 81.0 A European government is unseated due to resentment of fiscal austerity measures 59.8 A breakthrough in broadband technology makes High mobile computing more widely accessible 58.0 75.3 74.7 74.5 Scientists make significant advances in the development of an 70.3 efficient and cost effective battery for electric cars 50.0 69.9 Wage rise accelerates in emerging market economies, 68.6 raising prices for their exports and spurring global inflation 49.0 67.0 Putin’s reelection unifies the opposition movement 47.1 66.6 The collapse of austerity plans in periphery markets prompts 66.0 the exit of one or more country from the euro zone 46.3 64.6 China launches a second massive stimulus 46.0 63.8 63.0 63.0 Inflation in Brazil remains above the Central Bank’s target 59.8 of 6.5% and growth slows to less than 2% 36.6 Average A significant medical advance prompts a boom 57.0 in pharmaceutical stocks 35.2 Victorious Islamist parties adopt pragmatic and investor friendly policies in Egypt 33.6 Iran blocks the Strait of Hormuz precipitating 53.6 an oil price jump to over $150 per barrel 31.9 52.4 Oil exceeds $150 per barrel 31.8 52.0 A Fortune 500 company is brought down by a cyber attack 30.7 Chinas housing market crashes 29.9 China devalues the Renminbi to support exports 29.8 A clear plan for the euro zone is established after Greece’s exit, preventing contagion to other troubled economies 29.5 US growth rebounds to above 3.5% 27.3 41.7 Israel strikes Iran’s nuclear facilities 26.4 40.9 Water shortages spark a regional conflict 25.7 40.6 China’s stock market soars 23.4 40.1 Low India’s UPA government is forced from office in the wake of ongoing corruption scandals and rising popular discontent 23.3 The S&P closes the year up 20% or more 21.6 A cure for HIV/AIDS is discovered 20.6 Mexico’s government makes significant progress in curtailing the drug wars, leading to a rebound in economic confidence 18.9 A local incident spreads into a nationwide political opposition movement in China 15.3 30.2 29.5 27.1 Source: Economist Intelligence Unit Survey, January 20125 © The Economist Intelligence Unit Limited 2012
  7. 7. The Search for Growth Opportunities and risks for institutional investors in 2012 Introduction Global investors have replaced the bullish outlook remain very large. This raises the question: are many expressed in early 2011 with a more investors pinning too much hope on what appears tempered optimism. Global economic prospects to be just a respite in financial markets? continue to improve, thanks to aggressive action Responses from the survey indicate that by the European Central Bank (ECB), which has investors believe the principal risks the market will partially stabilised the euro zone. This has also face in 2012 relate to geopolitical events rather reduced pressures in the US, and latest economic than strictly market-based developments. They data suggests a glimmer of hope. However, also suggest that some positive surprises may be significant risks continue to be posed by the euro hovering in the wings: over half (58%) of zone’s peripheral markets, and following a series of respondents say that a breakthrough in broadband missteps by the Spanish government the euro zone technology that makes mobile computing moreAre investors crisis is threatening to return to the fore. widely accessible is likely, and 66% say that thispinning too much Yet the fundamentals of the global economy would have a positive impact on their portfolio.hope on what have not improved significantly, and new risks have However, there is undoubtedly a recognition thatappears to be just arisen to replace older ones. The recent rise in the the fragile post-2008 economy will linger for some price of crude oil, tied in part to tensions over time.a slight respite in Iran’s nuclear programme, has emerged as the This report is based on the second annual Searchfinancial markets? main obstacle to global growth—at least for the for growth survey of nearly 800 leading global moment. Even in the absence of military action, pension sponsors, non-profit portfolio managers, this is already creating headwinds for oil- economists, private equity and hedge fund dependent economies, particularly the US. managers and corporate executives as well as a The optimism displayed in this year’s survey of series of one-on-one interviews. The research, global institutional investors may be explained by sponsored by BNY Mellon, aims to provide an timing: the survey was conducted during the overview of the global economy and investment stockmarket rally that opened 2012. At this point, market that is unfolding in 2012, and to explore much of the positive economic news may already where investors are looking for growth opportunities be priced into the market, and downside risks in today’s tepid market environment.6 © The Economist Intelligence Unit Limited 2012
  8. 8. The Search for Growth Opportunities and risks for institutional investors in 2012 1 Global economic outlook: Tempered optimism after a roller-coaster year The threat to the global economy posed by the euro the level of government debt, with 84% expecting zone has moved from acute to chronic, and other it to rise this year. While this is in part attributable economic signposts are pointing in a more positive to the failure of the US Congress joint select direction. Growth in the US, although tepid by committee on deficit reduction, the so-called super historical standards, is firming, and the possibility committee, to reach a debt deal in November 2011, of a recession has all but disappeared. China looks the greatest challenge facing the US government is headed for a soft landing, with a respectable soaring healthcare costs, although the pain from growth forecast of 8.3% in 2012, according to the this will not be felt in the next 12 months. Overall, Economist Intelligence Unit. None of these Asia-based respondents appear confident that they improvements suggests that the global economy will see no surge in debt levels this year. Asia’s will perform at anything approaching a robust level strong economic fundamentals support thisInvestors over the next year, but a financial and economic assessment: both government debt and privateinterviewed for implosion—of the kind triggered by the bankruptcy debt are generally low compared with the West.this report of Lehman Brothers, a US investment bank, in late India is the exception in this group: 84% of India-repeatedly 2008—is less likely than it was at the start of 2012. based respondents are concerned that the level ofexpressed concern High levels of debt—both household borrowing government debt will rise rapidly this year. The and sovereign debt—continue to be a matter of reason for this is probably concern about theabout the debt concern. Investors interviewed for this report structural disarray of India’s public finances, whichburden of repeatedly expressed concern about the debt are characterised by large structural deficits andhouseholds, burden of households, governments and high public debt, as well as worry about corruption.governments and companies—particularly banks—which is a In addition to concern about government debt,companies. fundamental reason for the global economy’s over one-third of India-based respondents agree sluggish recovery from the 2008 global economic that the current United Progressive Alliance (UPA) crisis. Survey respondents do not expect major government is likely to be forced from office this progress on this front in the next 12 months: 47% year in the wake of ongoing corruption scandals. anticipate an increase in household debt in their Respondents are evenly split as to whether the domestic economy, virtually unchanged from 2011; impact of this would be positive or negative. 48% expect higher corporate debt, down from 58% Investors are also concerned about low levels of last year; and 63% predict a rise in government capital investment. Only 42% of respondents think debt, compared with 71% in 2011. However, that businesses will increase capital investment in assessments range widely from country to country. the next 12 months. The only sizable markets in US-based respondents are most concerned about which more than one-third of respondents expect7 © The Economist Intelligence Unit Limited 2012
  9. 9. The Search for Growth Opportunities and risks for institutional investors in 2012 Q Over the next twelve months, do you expect debt ratios across the following categories to increase in your domestic market? (% of respondents) Government debt Household debt Corporate debt Financial sector debt India 90% 75% 74% United States Brazil 80% Japan Germany United Kingdom 25% China South Korea 32% 36% 13% 0% 50% 0% 50% 0% 50% 0% 50% Countries ranked from most High and low figures in each category indicated Source: Economist Intelligence Unit survey, January 2012 to least projected debt to see more capital spending are China and India corporations to be investing significantly until the (both 36%); Brazil (43%); the US, where the economy is doing better,” says Esteban Jadresic, economy is improving slowly (62%); Japan, which chief economist and global investment strategist at is rebuilding following the natural catastrophes of Moneda Asset Management, Chile. 2011 (40%); and Australia, which is benefiting That said, some respite has been provided by the from China’s appetite for its natural resources Greek debt restructuring and the provision by the (39%). ECB of cheap finance beginning in the fourth❛❛ Hopes for further improvement hinge less on quarter of 2011 to aid financial institutions.In Europe, there’s economic activity generated by the private sector Somewhat better economic data in the US and thenot much reason than on governments’ ability to play their build-up of cash on large corporate balance sheetsfor corporations geopolitical roles properly—avoiding a Middle East have also reassured global investors that theto be investing crisis that could cause oil prices to spike being a financial markets are sufficiently more stable thansignificantly until critical example. While investors are roughly split they were in the middle of last year to warrantthe economy is on whether tensions in the Middle East will escalate dipping into once again. Among survey this year, they are nearly unanimous about the respondents, 85% perceive significantdoing better. extent of the impact it would have on their opportunities, compared with 86% in 2011. Of that❜❜ portfolios: 68% say that they would be negatively group, 34% say they intend to take advantage ofEsteban Jadresic,chief economist and global impacted if Iran blocked the Strait of Hormuz, those opportunities in the next 12 months, up frominvestment strategist, precipitating an oil price jump to over US$150/ 28% last year, while the proportion who say theirMoneda Asset Management,Chile barrel, and 71% say the same of an Israeli-led concerns about downside risks will keep them from strike on Iran’s nuclear facilities. Engineering a doing so has dropped to 51%, from 58% last year. lowering of public debt in overleveraged developed It must again be noted, however, that investor countries is perceived as another key threat to the sentiment may owe more to the stockmarket rally global economy. Among developed economies, that was under way when the survey was in the field while the outlook in the US is better than last year, than to any suggestion that the fundamentals of “in Europe, there’s not much reason for the global economy have improved.8 © The Economist Intelligence Unit Limited 2012
  10. 10. The Search for Growth Opportunities and risks for institutional investors in 2012 2 The European dilemma Not only was 2011 a tumultuous year for Europe— potential in the next 12 months. More than 60% and specifically the euro zone—but real relief is not expect the euro itself to decrease in value—the expected soon. The EIU forecasts a GDP contraction worst projected performance for any currency of 0.7% in the euro zone in 2012, recovering to covered in the survey and a dramatic turnabout growth of 0.5% in 2013. In real terms, these from 2011, when 53% of respondents expected the forecasts mean that the region’s GDP will recover to euro to appreciate. 2008 levels only in 2013. Greece and Portugal are Some investors expressed positive surprise that both forecast to experience sharp contractions this the euro zone was able to avoid a major crisis year. Spain and Italy—the most troubled of the thanks to the ECB’s long-term refinancing large European economies—are facing somewhat operations (LTROs) and the Greek debt deal. But the milder shrinkage, and even Germany is expecting a negative forecasts—and the absence of any scenarioMore than 60% slight contraction of 0.3%. Europe’s sovereign debt for strong recovery any time soon—have promptedexpect the euro to troubles are far from over. Spain and Italy saw their a great deal of speculation about the ultimatedecrease in value- ten-year bond yields fall early in the year, but only future of the zone itself. Recent political to the still-high neighbourhood of 5%, while the misjudgements in Spain have also eroded thethe worst Greek debt reconstruction only succeeded in recovery in investor confidence that accompaniedprojected lowering the country’s ten-year yields to just less the injection by the ECB of more than €1trn intoperformance for than 20%. regional financial institutions. Under the EIU’sany currency Corporations based in the euro zone are baseline forecast Greece is likely to remain withincovered in the estimated to hold an unprecedented €2trn the euro zone for at least the next two years, as thesurvey. (US$2.6trn) in cash, with those based in the UK government appears convinced that the costs of holding £750bn (US$1.2trn), according to the leaving, including an outright debt default, would Institute of International Finance. This, combined outweigh any benefits. That said, keeping Greece in with high risk premiums in some markets, the the fold could mean years more of financial support sustained efforts by banks to build capital buffers by euro zone governments, and possibly further and the continued deleveraging by highly indebted debt write-downs. Meanwhile, the economic cost of households, will hold down investment and austerity plans in other European countries is consumption until 2013, when growth will return— taking a political toll in Spain, Portugal and even but feebly. the Netherlands and Finland, where Eurosceptic Investor sentiment echoes these grim forecasts. political parties are finding audiences. Only 17% of survey respondents consider the EU Relatively few survey respondents hold out hope among their top markets for asset price growth that European officials can hammer out a plan to9 © The Economist Intelligence Unit Limited 2012
  11. 11. The Search for Growth Opportunities and risks for institutional investors in 2012 The euro zone: scenario analysis (% of respondents) EURO ZONE: The collapse of austerity plans in periphery markets prompts the exit of at least one country from the euro zone LIKELIHOOD: 29% | IMPACT: 89% GLOBAL: The collapse of austerity plans in periphery markets prompts the exit of at least one country from the euro zone LIKELIHOOD: 46% | IMPACT: 85% EURO ZONE: A clear plan for the euro zone is established after Greece’s exit, preventing contagion from speading LIKELIHOOD: 40% | IMPACT: 72% GLOBAL: A clear plan for the euro zone is established after Greece’s exit, preventing contagion from speading LIKELIHOOD: 40% | IMPACT: 72% Impact Likelihood Source: Economist Intelligence Unit survey, January 2012 prevent the spread of contagion from Greece to respondents say that a clear plan would have a other troubled economies. Less than 30% say such positive impact on their portfolio or business, a deal is likely. More than 46% of survey compared with 63% of global respondents. respondents agree it is likely that an austerity plan Similarly, 61% of euro zone respondents say that will collapse in one or more peripheral euro zone the exit of one or more countries from the euro countries in the next 12 months, prompting those zone would have a negative impact on their countries to abandon the single currency. More businesses or portfolios, compared with 51% of than half say that the impact on their portfolios of global respondents. such an event would be negative. Optimism stems also from a strong feeling thatEuro zone-based Interestingly, euro zone-based investors are European political leaders are solidly committed toinvestors are more more optimistic about the fate of the currency avoiding the pain of a break-up. “They would stop itoptimistic about union. While only 30% of global investors as a at all costs,” says Antje Engelhardt Correa, group agree that a clear plan for the euro zone will international project finance and investmentthe fate of the be established, 40% of investors based in the euro manager, Enercon GmbH, a German wind turbinecurrency union. zone agree. Likewise, nearly half (47%) of global and turn-key wind park manufacturer, referring to investors consider it likely that the collapse of the departure of Greece from the euro. “It would be austerity plans in peripheral markets will prompt a problem for the whole of Europe—all the the exit of one or more countries this year, but less sovereign states. It might be seen as something than one-third (29%) of euro zone-based investors that could happen if you are looking from outside agree. The difference of opinion is perhaps in part Europe, but from within? No.” because firms used to transacting most of their Investors based outside the euro zone, however, business in the euro area for the past decade have are seriously questioning how long the public in more to lose from its dissolution. The survey peripheral member states will go along with responses bear out this analysis: 72% of euro zone seemingly open-ended austerity measures. “The10 © The Economist Intelligence Unit Limited 2012
  12. 12. The Search for Growth Opportunities and risks for institutional investors in 2012 LTRO has bought Spain and some of the other experiencing more than 50% youth unemployment. southern governments some time, but it’s difficult “It took Argentina three years and several forecasting how long it will be before the presidents before they lost patience [with fiscal population’s patience is used up,” says Charles austerity]. That’s the risk in southern Europe, which Robertson, global chief economist at London-based I think is a year or so away.” Renaissance Capital, noting that Spain is Sovereign debt anxieties: the next bubble Excessive sovereign debt burdens are a problem not only in the euro zone. Higher—in Heavy burden: Expansion of public debt (% of GDP) some cases much higher—public debt burdens Forecast have been a growing concern for governments, 250% Japan investors and taxpayers in the developed world since the 2008 financial crisis, if not 200% before. In the US the ratio of debt to GDP nearly doubled in two years and has continued to climb since then. In other developed 150% countries public debt levels have exploded Italy even more quickly, feeding concerns about 100% United fiscal instability, rising interest rates and, in Kingdom United the long run, a deterioration of economic States competitiveness, as more and more of national 50% income is devoted to debt service rather than productive capacity. Nearly two out of three survey respondents 2004 2006 2008 2010 2012 2014 attach a high probability to government debt Source: Economist Intelligence Unit forecast ratios increasing. In the US, the ratio of public debt to GDP is forecast by the Economist Intelligence Unit to EIU expects the currencies of all three countries to appreciate rise to almost 70% in 2012, up from 66% last year. The UK in value in 2012. posted its largest-ever peacetime deficit—11% of GDP—in Investor sentiment supports a continuation of low interest 2009, along with a 70% ratio of public debt to GDP. Despite rates and high demand for “good” sovereign debt over the enacting an emergency budget in June 2010 and setting a five- next one to two years. Reasons include continued global year plan for fiscal tightening, the EIU still expects public debt deleveraging along with the continuing threat of another crisis to rise to 90% of GDP, from 86% in 2011. Japan has also built a in less creditworthy countries in Europe. steadily higher level of public debt since the 2008 crisis, which Beyond that period, however, investors also agree that a the EIU expects to rise to 224% of GDP in 2012, up from 212% bubble could appear in developed countries’ markets for last year, giving it the largest such burden in the world. sovereign debt. Once credit problems are resolved elsewhere, What the US, the UK and Japan have in common is that these countries’ debt may no longer be seen as a form of despite their historically high levels of public debt, all three insurance, and investors may then reduce their holdings, continue to enjoy low interest costs. All three have been forcing yields up. “If anything, they’re overvalued, and that beneficiaries of a “flight to quality” during the post-2008 could reverse and have a strong impact on markets,” Esteban recession and slow recovery, given their solid credit histories, Jadresic, chief economist and global investment strategist at large and diversified economies and stable institutions. The Moneda Asset Management in Chile warns.11 © The Economist Intelligence Unit Limited 2012
  13. 13. The Search for Growth Opportunities and risks for institutional investors in 2012 3 Geopolitics: The threat to oil prices Even as the risk of a disorderly collapse of the euro bleaker. Slightly less than one-third of survey zone has receded, the possibility of an oil price respondents agree that US$150/barrel within the shock has emerged as the foremost threat to the next 12 months is likely with or without a Middle global economy. The EIU forecasts that the Eastern crisis, and 26% think an attack by Israel on benchmark price for dated Brent blend will average Iran’s nuclear facilities is likely. Just over 70% of US$110/barrel in 2012, with a slightly higher price respondents say that an oil price of US$150/barrel of US$115/barrel in the first half of the year owing would negatively affect them—the largest negative to uncertainties created by the European embargo impact recorded for any of the scenarios included in and sanctions on Iran. Following a surge in oil the survey. According to 69% of respondents, the prices in early March, some analysts say they do closing of the Strait of Hormuz would negatively not consider a price of US$5/gallon for gasoline to affect them. However, the closing of the Strait byOne reason for the be out of the question in some parts of the US. This Iran in retaliation for US and EU sanctions isextreme could seriously hurt the US recovery, not least via unlikely, some investors argue, since the economysensitivity to oil its impact on consumer confidence. Ben Bernanke, most directly damaged would be that of Iran itself.price disruptions chairman of the Federal Reserve (Fed, the US One reason for this extreme sensitivity to oil central bank), recently told a congressional price disruptions may be that their economic effectsmay be that their committee that “rising global oil prices are likely to are not as easy to shake off as in the past. Beforeeconomic effects push up inflation temporarily while reducing the explosion in demand from emerging markets,are not as easy to consumers’ purchasing power”. investors could count on severe energy price hikesshake off as in the These scenarios assume that a military eventually stifling their own demand by dampeningpast. confrontation between Iran, Israel and the US— global economic activity. This self-correcting specifically, an attack on Iran’s nuclear facilities— mechanism no longer works, Mr Robertson argues. does not take place. Should that occur, the EIU Instead, consistently high demand for oil and gas forecasts a severe oil price spike amounting to a 30- from emerging markets—particularly China—tends 50% jump in prices in a matter of days or weeks, to buoy prices even when developed economies are halting the global economic recovery and in a slump. Global energy demand is expected to threatening another recession. Indeed, given the grow only incrementally through the first half of the easing of the euro zone crisis following the LTROs decade, according to the EIU. But while oil and the Greek debt write-down, a possible oil price consumption in 2012 is expected to decline slightly spike has now taken its place as the EIU’s principal in Europe and North America—indeed, across the global economic concern. entire OECD group of economies—owing to If anything, investor sentiment is somewhat continuing economic sluggishness, it is expected to12 © The Economist Intelligence Unit Limited 2012
  14. 14. The Search for Growth Opportunities and risks for institutional investors in 2012 keep rising at a healthy pace in China and the rest often than any other category as being among the of emerging Asia. top three opportunities for revenue growth in 2012, As a result, survey respondents expect oil and although down from 2011. The sector was chosen gas to be one of the highest-growth industries in by 29% of respondents this year, compared with the next 12 months. They cited oil and gas more 45% in 2011. Moving away from commodities Price pressure from major commodities other than oil is becoming more of a concern to investors. Almost one in four Q Over the next twelve months, which of the following asset classes do you think will perform most strongly? (% of respondents) survey respondents agreed that water shortages could spark a regional conflict Domestic 2012 26% somewhere in the world, and 57% said stocks 2011 15% such an event would have a negative Overseas stocks 2012 20% impact on their portfolios—10% thought (emerging) 2011 26% this could be very negative. 2012 14% In a notable turnaround from last Commodities 2011 26% year, however, commodities lost their place as the asset class that global Corporate 2012 8% bonds 2011 3% investors expect to perform best over the next 12 months. This reflects lower Overseas stocks 2012 7% (developed) 2011 8% demand for many raw materials from sluggish developed markets in the euro Government 2012 7% zone and elsewhere. Another reason, bonds 2011 3% some investors noted, may be a desire by 5% Private equity 2012 large institutions to concentrate on 2011 4% highly liquid assets during a time of 4% Hedge funds 2012 uncertainty. Only 14% of survey 2011 5% respondents cited commodities as their Currencies 2012 3% expected top performer, down from 26% 2011 3% in 2011, when they tied for the top spot 3% with emerging-market equities. The Real estate 2012 2011 4% latter fell off their perch as well, 2012 3% displaced by domestic equities, which Cash 2011 3% Source: Economist Intelligence Unit survey, 2011, 2012 were picked by 26% of respondents.13 © The Economist Intelligence Unit Limited 2012
  15. 15. The Search for Growth Opportunities and risks for institutional investors in 2012 4 The US: Risk/reward target Investors are taking heart from the US economy’s in six quarters. This was buoyed by unexpectedly modest upturn. The US economy, by almost any strong consumer spending, although much of the measure, remains weak: the unemployment rate is new activity was attributed to inventory alarmingly high (above 8%), housing prices replenishment. The stockmarket has responded continue to fall, and debt levels are elevated. strongly to these positive signs: by mid-March the However, the economy grew at an annualised rate S&P 500 had posted an 11% advance from the start of 3% in the fourth quarter of 2011, its fastest rate of the year.Q Which of the following regions and countries offer the best potential for asset price growth over the next twelve months? (% of respondents) 2012 44% China 2011 49% 2012 41% India 2011 46% 2012 40% United States 2011 34% South-east Asia 2012 37% +9% Greatest increase 2011 28% Brazil 2012 33% -8% Greatest decrease 2011 41% 2012 17% European Union 2011 13% Gulf Cooperation 2012 13% Council 2011 5% 2012 11% Russia 2011 17% 2012 9% Japan 2011 10% Source: Economist Intelligence Unit survey, 2011, 201214 © The Economist Intelligence Unit Limited 2012
  16. 16. The Search for Growth Opportunities and risks for institutional investors in 2012Some see the The EIU forecasts US GDP growth of 1.9% for consistent upswing that might have been expectedimpending 2012, a 0.2% improvement over 2011. Japan, during a normal recovery from recession.presidential which is in disaster reconstruction phase, is the Some see the impending presidential election as only other leading economy within the OECD where a positive force, discouraging either political partyelection as a growth is expected to be stronger this year than in from engaging in more of the budgetarypositive force, 2011. In this year’s survey the US has jumped from brinksmanship that punctuated 2011. Thediscouraging fourth to third place for asset price growth, with administration of Barack Obama plans no furthereither political slightly more than 40% of respondents placing it fiscal tightening in 2012, but a series of fiscalparty from among their top three markets, just behind China deadlines just after the election, including theengaging in more (44%) and India (41%) and ahead of South-east expiration of the Bush administration’s tax cutsof the budgetary Asia (37%). “The US is the place with respect to the and the due date for the massive spending cuts risk/reward trade-off,” says Jaya Shankar, mandated under last year’s deal to raise the federalbrinksmanship executive director of HDIL Securities Ltd in India, debt ceiling, would tend to encourage both partiesthat punctuated noting also that Standard & Poor’s downgrade of to once again attempt a grand bargain that could2011. US Treasury securities last year did not lead to result in significant deficit reduction. Whoever wins investors abandoning the US dollar, reflecting in the presidency in November will face pressure to part the unrivalled depth of the US capital markets. cut federal spending in 2013. If the economic But the optimism with which investors appear to recovery continues, the pressure to cut federal have greeted these positive signs may be spending—and borrowing—to avoid a “crowding misplaced: while the US economy has gained out” of private investment will intensify. The result ground in the last six months and another would be fiscal belt-tightening, which could hinder recession in the short term seems unlikely, most a faster economic recovery—at least in the short economic indicators have not displayed the term.15 © The Economist Intelligence Unit Limited 2012
  17. 17. The Search for Growth Opportunities and risks for institutional investors in 2012 5 Emerging markets: Supporting the global economySurvey In stark contrast to economies in the developed asset growth over the next 12 months, with 82% world, the largest emerging markets continue to agreeing with that statement. In contrast, only 7%respondents perform strongly. Booming exports to these deemed the outlook for emerging markets not tooverwhelmingly countries helped to buoy poorer economies in Sub- be positive, and only 10% said that emergingselected emerging Saharan Africa and South America, which might markets were nearing their peak.markets as otherwise have slipped into recession after 2008. Of course, some concerns were expressed as tooffering the best Whereas non-OECD countries are projected how long these fast-growing economies canpotential for asset collectively to post 5.5% real GDP growth in 2012, maintain this pace, especially if demand from thegrowth over the OECD countries taken together are expected to post developed world continues to be soft. Although growth of just 1.2%, with improved performances domestic demand is beginning to play a bigger rolenext 12 months. in the US and Japan outweighed by recession as middle classes emerge and become more across much of the EU. Not surprisingly, therefore, prosperous, this process is still in its infancy, and survey respondents overwhelmingly selected exports remain a key driver of growth for many emerging markets as offering the best potential for emerging markets. The largest emerging markets— Q Which of the following statements best expresses your view of investing in emerging market assets? (% of respondents) Emerging market assets offer the best potential 27% for growth over the next 12 months Emerging market assets offer very strong 57% potential for growth but I am concerned that some markets could be overheating Emerging market assets are nearing their peak 10% in value The outlook for emerging market assets does 7% not look positive over the next 12 months Source: Economist Intelligence Unit survey, January 201216 © The Economist Intelligence Unit Limited 2012
  18. 18. The Search for Growth Opportunities and risks for institutional investors in 2012Q In your view, where is the next asset price bubble most likely to form? (% of respondents) 2011 2012 Property in emerging markets 19% 25% +6% Greatest Government debt in increase developing markets 15% 19% +4% Commodities 23% 9% -14% Greatest decrease Equities in emerging markets 12% 8% -4% Bonds in emerging markets 4% 8% +4% Bonds in developing markets 5% 8% +3% Equities in developing markets 6% 7% +1% Currencies in emerging markets 3% 4% +1% Property in 5% 3% -2% developing markets Currencies in developing markets 4% 3% -1% Government debt in emerging markets 4% 3% -1% Source: Economist Intelligence Unit survey, 2011, 2012 China, Brazil and India—slipped from last year as exposure to struggling developed economies. Asked the top asset-growth performers. While China where the next market bubble was likely to develop, remained the top-ranked, it was by a smaller margin 25% of respondents mentioned property in than last year, and overheating remains a concern. emerging markets, the most of any category this This is in line with a lower growth forecast for this year, displacing commodities, which were most year. Fifty-six percent agree with the statement that often named in the 2011 survey. Since the survey “emerging-market assets offer very strong potential was conducted at the beginning of this year, policy for growth, but I am concerned that some markets action in China and an overall slowdown in Brazil could be overheating”, although this was down have largely dispelled the risk of a property bubble. from last year’s 66%. This would change if China, or other governments, David Chapman, director of risk management at took fright from a rapid global slowdown and the Catholic Healthcare Investment Management launched another massive stimulus package, in Company in the US, said his team holds a positive which case cheap money would probably gravitate view of emerging markets but are sensitive to those towards the property markets in emerging countries, like South Korea, with the greatest economies.17 © The Economist Intelligence Unit Limited 2012
  19. 19. The Search for Growth Opportunities and risks for institutional investors in 2012 China: Broadly optimistic China has continued to enjoy annual GDP growth above 10% in However, the possibility of a more serious outcome cannot recent years, although concerns related to the housing market be ruled out. A severe euro zone recession or higher oil prices and softer demand for exports have prompted lower would have a big impact on China and its main export expectations for 2012. The Economist Intelligence Unit customers. That, in turn, might prompt the Chinese forecasts growth at 8.3% in 2012, down from 10.1% in 2011. government to implement a major stimulus package on a The announcement in March by the Chinese premier, Wen similar scale to that of 2008, especially since a major Jiabao, of a scaling back of the official minimum growth target leadership reshuffle is due to take place during the coming for 2012 to 7.5% (from 8% in recent years) signals the year. The spectre of labour unrest in China’s manufacturing authorities’ recognition that China is entering a phase of slower belt could frighten policymakers into abandoning their current growth, although in practice these targets are usually floors. prudence. However, 84% of investors surveyed consider it Survey respondents were more positive about China’s unlikely that a local incident would spread to become a potential for economic growth in the next 12 months than nationwide political opposition movement. they were about its likely asset-growth performance, with Investors suggest the government might instead introduce nearly 60% expecting it to be positive. Chinese investors a series of low-key, targeted stimulus packages designed to themselves are among the most optimistic, with encourage lending and fund infrastructure 45% saying they expect domestic stocks to be projects. Targeted stimulus could also be aimed their top performers, the most selected asset Over half of all at building up inland cities, more advanced class by a significant margin. However, survey manufacturing and transport and infrastructure, according to a similar percentage of respondents agree suggests Tze Hoe Chan, director at Zendo respondents, these are most likely to carry a that the chances Holdings, an Asia-focused strategic and private higher level of risk. equity advisory firm in Singapore. This would of the Chinese Lower demand for Chinese goods from help keep low-wage jobs from leaving the slumping developed markets has yet to be authorities country, since companies could instead shift counterbalanced by a substantial increase in launching another them from the coastal regions to inland cities. domestic consumption. The country recorded a massive stimulus The housing market remains a focus of trade deficit of US$4bn at the start of 2012. The are slim. concern, but the government has taken end of a long boom in up-market housing is also measures to prevent a sharp decline, including generating concern. In February housing prices greater public expenditure on social housing in 100 major cities in China fell for the sixth consecutive and relaxed reserve requirements for banks. Only one-third of month, based on data compiled by China Real Estate Index survey respondents consider it likely that a housing market System, partly as a result of a deliberate policy of reining in crash will occur in China in the next 12 months, although 66% speculators in high-end developments. However, the Chinese agree that such an event would have a negative impact on New Year celebrations—which fell on January 23rd this year— their portfolios. However, a housing bubble in China would be will have influenced February’s economic data. on a far smaller scale than the one that tripped up the US in The EIU nevertheless expects the Chinese authorities to 2007-08, as Steffen Bassler, director at Credit Suisse Securities engineer a soft landing. This is mainly because the (Europe), points out. Chinese real estate markets are far less alternative—a large stimulus to stave off a slowdown for a year globally connected than US markets. Additionally, China is or two—would drastically dim the long-term outlook for the better able to absorb the shock, according to Michael Strauss, Asian giant by expanding government debt to dangerous chief investment strategist and chief economist at levels. Over half of all survey respondents (54%) agree that Commonfund in the US, since a collapse of demand at higher the chances of the Chinese authorities launching another price points can be partially buffered by a large demographic massive stimulus are slim. demand for housing at lower prices.18 © The Economist Intelligence Unit Limited 2012
  20. 20. The Search for Growth Opportunities and risks for institutional investors in 2012 Asia and Latin America: New focus on smaller markets Slower growth in China and India is shifting attention to some leading to concerns of a sustained slowdown. It slipped to fifth of the smaller economies, particularly in South-east Asia. place overall, selected by 35% of respondents, down from 41% Smaller economies are likely to benefit from demographic in 2011. Taking its place is South-east Asia, selected by 37% of trends—such as relatively young populations—as well as respondents, up from 28% in 2011. economic and political factors such as low wage costs, low In a similar fashion, some investor attention is starting to public and private debt levels, rising domestic consumption shift from Latin America’s giants to some of the region’s and deepening financial markets. Together, these factors add smaller economies. Growth throughout the region declined up to a more reassuring environment for business than in the markedly in 2011, hurt in part by falling export demand. Brazil larger economies. was especially hard hit, dropping from a blistering pace of The Economist Intelligence Unit expects Asia 7.5% to 2.9% real GDP growth. The EIU is and Australia (excluding Japan) to continue to forecasting a recovery to 3.3% in 2012, buoyed grow strongly in 2012-16—indeed, to remain Smaller by a 14.3% rise in the minimum wage that is the fastest-growing region in the world, economies are expected to boost consumption. A stronger expanding by more than 6% a year at market likely to benefit pick-up is anticipated in 2013, as the effects of exchange rates. Rising domestic consumption from demographic the ongoing monetary easing cycle, coupled and rising wage costs in China are expected to with a relaxation in credit restrictions, are felt, stimulate production in lower-cost neighbouring trends as well as fiscal policy becomes more expansionary and countries. Bangladesh, Vietnam, Cambodia, Sri economic and public banks boost lending. Colombia, Peru and Lanka and Indonesia are expected to benefit political factors. Chile are also expected to experience slower from these trends. growth in 2012. But their levels are expected to India may contribute to the trend as well. remain fairly robust at 4.9%, 5.1% and 4.3% Like China, it is experiencing lower growth. The EIU has respectively, in part owing to recovering demand in the US and dropped its real GDP growth forecast for 2012-13 to 6.9% from the resilience of markets within Latin America itself. 7.2% in 2011. In the long term private consumption and Still, only 19% of survey respondents named Latin America investment should drive stronger growth, but inflation may as one of the best prospects for economic growth in the next temper that. Although inflation has slowed from 8.9% in 2011, 12 months, little more than half the percentage who it remains stubbornly high, and the threat of a surge in global mentioned Brazil specifically. Esteban Jadresic, chief oil prices, precipitated by an escalation of geopolitical economist and global investment strategist at Moneda Asset tensions or a failure of the monsoon—a perennial concern in Management in Chile argues that Brazil’s economy has been India—could see the inflation rate jump. overheating, spurred by rapid credit growth and threatened by Investor sentiment is beginning to reflect these shifts. As a tight labour market, suggesting it “is going through an was the case last year, China and India were most often adjustment to maintain a stable economy going forward”. The mentioned in the Economist Intelligence Unit’s 2012 Search over-valuation of the Real may also be a cause of concern. for growth survey as offering the best opportunities for asset According to Jim O’Neill of Goldman Sachs the Brazilian price growth. Brazil contracted slightly in the third quarter of currency needs to decline in value by 20% to keep Latin 2011, owing to policy tightening in the first half of the year, America’s biggest economy competitive.19 © The Economist Intelligence Unit Limited 2012
  21. 21. The Search for Growth Opportunities and risks for institutional investors in 2012 6 Monetary policy, inflation and interest rates “Central banks and finance ministries have the enabled the US recovery to continue, while the toughest job in the world right now,” says Patrice ECB’s two LTROs stabilised bank funding markets in Conxicoeur, managing director, global insurance the euro zone. coverage at HSBC Asset Management (Hong Kong) Much of this was controversial, but according to Ltd., “but I’m agnostic on whether they’ll get it the survey these interventions have boosted right.” In the wake of the 2008 crisis these investor confidence in central bankers’ handling of institutions have repeatedly intervened to shore up monetary policy—and thus in the political liquidity in key markets while attempting to underpinnings of future economic growth. Survey manage a soft landing in China and collaborate on respondents expressed greater confidence in a write-down of Greek debt. Many of the tasks they central bankers this year than last—54%, compared have taken on are unprecedented, requiring them with 51% in 2011. In contrast, only 36% of to assume non-traditional responsibilities and respondents said they were confident of engineer creative solutions in crisis situations. The governments’ ability to make the right decisions, Fed’s “Operation Twist” last autumn may have down slightly from 2011. Central banks understandQ How confident are you in the abilities of the following administrations to make the right decisions to ensure strong performance in your domestic economy over the next twelve months? (% of respondents) Central Bank 54% Confident 26% Neutral 20% Not confident Financial regulators 36% Confident 25% Neutral 39% Not confident Government 34% Confident 22% Neutral 44% Not confident Source: Economist Intelligence Unit survey, 2011, 201220 © The Economist Intelligence Unit Limited 2012
  22. 22. The Search for Growth Opportunities and risks for institutional investors in 2012 economies and business mechanics better than the next 12 months would be an exogenous event governments, Mr Bassler says. “There’s a halo effect such as an oil price spike, rather than events in the on central banks, because they’re more economy itself or a policy decision. independent of politics.” However, as Mr Chapman The softening of global demand this year notes, their efficacy is limited if lawmaking bodies compared with 2011 and the ongoing fragility of do not have the expertise to work with them rather the global economy have led respondents to expect than being at cross-purposes. that interest rates will remain largely stable. In Recent events suggest that the gulf in confidence 2011 the majority of respondents expected rates to could narrow. In the US, the Fed and the Treasury rise in the US, the UK, China and the euro zone—the Department have had to work closely together to only exception was Japan. Now the majority expect stabilise that country’s banking system since 2008. rates to hold steady for the next 12 months in all In Europe, the “troika” of the ECB, the IMF and the major markets. European Commission succeeded in pulling Interest rates in developed markets have been❛❛ together euro zone national governments and very low since the global recession, and since lateThere’s a halo leading holders of Greek debt in the recent deal to 2011 have been on a loosening trend in many keyeffect on central write down and reorganise that debt. emerging markets as those economies have slowed. One key investor concern—inflation—appears to China, for example, stopped raising rates in thebanks, because be firmly under control. The EIU forecasts global second half of 2011 and is not expected to boostthey’re more inflation to drop from 3.9% in 2011 to 3.3% this them again until late 2012. Brazil has now beenindependent of year and to hover around that level through to easing rates since August 2011 and is expected topolitics. 2016. Factors contributing to the reduction include keep them low (at least by Brazilian standards)❜❜ a decline in food prices, which were a major source until 2013. In India, which began raising ratesSteffen Bassler, director, of concern last year; a decline in property prices in steadily in January 2010, the central bank recentlyCredit Suisse Securities(Europe) Ltd, UK China, which had been generating inflationary decided to hold them at 8.5%; a cut is now widely pressures in that country; and continuing high expected. unemployment in slowly recovering developed Concerns are beginning to build about how long markets. the current phase of very low interest rates can last, “There’s so much unemployment that it’s hard to however. Debt loads are growing rapidly in see where inflation could come from,” notes Ben developed markets such as the US, Japan and the Whitmore, manager of the Jupiter UK Special UK, which have taken advantage of low rates to Situations Fund (Unit Trust) at Jupiter Asset facilitate their increased borrowing. James Davis, Management. A Swedish banking official, who asked vice president of strategy and asset mix at the to remain anonymous, argues that too much Ontario Teachers’ Pension Plan, a public pension deleveraging still needs to take place for inflation fund with about C$117bn in assets, cites brewing to gain a foothold. Michael Taylor, CEO of the concern about the impact of low rates on pension London Pensions Fund Authority, and Mr Strauss liabilities, which could force some employers to agree that the one potential source of inflation in make larger contributions to plans if it persists.21 © The Economist Intelligence Unit Limited 2012

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