Money Managers See Inflation Threat Increasing

January 14, 2011 ( – Institutional investment managers expect global inflation to increase and interest rates to rise in the coming months as economic growth accelerates and corporate earnings continue to grow, according to a quarterly survey by Northern Trust.

The survey for the fourth quarter of 2010 showed that 62% of managers believe global inflation will rise over the next six months. This measure is up approximately 40 percentage points from the third quarter survey and is the highest level recorded since Northern Trust began its survey in the fourth quarter of 2008. 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 also the highest level recorded since the survey’s inception.

Fifty-five percent 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% 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), in a news release. “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 remained positive regarding market valuations. The majority of managers (58%) stated that the U.S. equity market, as measured by the S&P 500 Index, is undervalued. Select areas of international markets are also seen to be attractive, with 55% of managers stating that Japanese equities are undervalued.  The biggest shift in valuation sentiment was in emerging market equities, where 39% of managers believe that the segment is undervalued, a significant decrease from the 59% who held this view in the third quarter, Northern Trust said.

Other findings from the survey include: 

  • In the fourth quarter’s topical question, managers were asked for their views on the impact of the U.S. Federal Reserve’s second round of quantitative easing. Just over half (52%) of managers expect the Fed’s program to have a positive impact on the U.S. economy.
  • Investment managers cited technology, energy, consumer discretionary, emerging markets and health care as the top five most attractive market segments. 
  • Cash levels were stable for most managers during the fourth quarter.  The majority of managers, 75%, continue to be working within their normal cash range, down from 86% in the third quarter.  There were slight increases in the percentage of managers working with cash levels both above (11% versus 5% last quarter) and below their historical norm (15% versus 10% last quarter). 

The survey of approximately 97 institutional managers was conducted by NTGA in mid-December. All respondents participate in NTGA’s external manager platform and are utilized in investment products including mutual funds, separate accounts, emerging manager programs, and other investment solutions.