Investors Fear Inflation as Global Economy Stabilises

Inflation fears fuel risk taking, as investors see light at the end of the economic tunnel.

(March 20, 2012)  —  Investors have become concerned about rising inflation as the global economy appears to have stabilised, a monthly fund manager survey has found.

There was a sharp increase in the number of investors expecting inflation to rise in the coming year, according to the monthly Bank of America Merrill Lynch Fund Manager Survey. A net 13% feared inflation would rise against a net 16% last month predicting it would fall.

Michael Hartnett, Chief Global Equity Strategist at BofA Merrill Lynch Global Research, said: “The prospect of higher inflation reflects a victory of central banks in the war against deflation. Risk appetite is rising with hedge funds more active, but cash is still on the side-lines to put to work.”

This investor sentiment goes against the news today that inflation, in the UK at least, had fallen from 3.6% to 3.4% month on month. However, economists had forecasted it would drop further, to 3.3%.

Contributing factors to the thoughts on inflation come from a stronger belief in the recovery of the global economy, with a special mention for the beleaguered Eurozone.

The survey said: “Global investors hold far fewer fears about the eurozone. The numbers naming European Union sovereign debt as their number one “tail risk” have declined sharply to 38% this month from 59% in February.”

The survey found investors within the eurozone were both more bullish about growth and far less worried about corporate profits. A net 7% expected corporate earnings in the eurozone to deteriorate in the coming 12 months, down from a net 39% in February and a net 84% in December.

Gary Baker, Head of European Equities strategy at BofA Merrill Lynch Global Research, said: “We are witnessing a rehabilitation of European growth prospects, boosted by a sharp fall in EU sovereign concerns.”

Despite fears of rising inflation, and potentially to hedge its affects, investors have begun to take on more risk. Banks and financial institutions, which are often the first stocks to lead markets out of a slump, enjoyed a second month of popularity as investors increased these allocations to their equities holdings.

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