Rising interest rates and tail risk top investor concerns

Rising interest rates are seen as the greatest threat to investment performance over the next three years, followed by tail risk, according to Allianz Global Investors’ first global RiskMonitor survey.

Although few expect interest rates to reach long-term historical averages before 2015, a quarter of investors see rising rates as a ‘great risk’, and 31 percent see the issue as a ‘considerable risk’, reveals the study of nearly 400 senior decision makers at institutional investors across 41 countries. Tail risk is described as ‘great’ by a fifth of respondents and an additional 39 percent view it as ‘considerable’.

Noting the ‘double-edged’ nature of relaxed monetary policies, 59 percent believe the actions of central banks have boosted short-term GDP growth. Similar numbers see increases in inflation (57 percent), systemic risk (55 percent) and ‘a deterioration in the health of the retirement savings system’ (54 percent) as side effects of such policies.

Over the past five years, the monetary policies of developed nations have ‘increased the risk of abnormal price distortions in the fixed income market’, according to more than two thirds of investors.

Despite these concerns, investors are rediscovering their appetite for risk-taking, says Allianz. Equity risk is seen as likely to pay off over the next three years, according to 60 percent of respondents (credit risk is mentioned by only 32 percent, add researchers). When it comes to global equities, more than 90 percent of investors expect positive returns over the next three years, with the average expected annual return coming out at 6 percent.

‘Like the investors surveyed, we expect monetary policy to be accommodative for quite some time,’ says Elizabeth Corley, CEO of Allianz Global Investors, in a press statement. ‘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 risk assets – equities – are seen as the most likely asset to pay off in the coming year.’

Allianz also investigated the cost of regulation, finding pessimism to be ‘particularly evident in the responses from Europe’. On average, Allianz says the net effect of regulation is seen to hold back annual investment performance by 2.3 percent.