This Financial Crisis Exposes Investors to Opposing Forces

 
This Global financial crisis, and its aftermath expose real-money investors to opposing forces, which may interact with the recent banking regulatory initiatives in a manner that carry risks to financial stability, the International Monetary Fund (IMF) warned Tuesday.

The crisis has made long-term investors more risk conscious, especially with respect to liquidity and sovereign credit risks, including those of advanced economies.

The results of the IMF Survey on Global Asset Allocation, and other information about recent allocations indicate that investors have in general not yet moved into riskier assets to enhance yields, the IMF said in a report released Tuesday prior to its upcoming annual meetings.

Plus, the low interest rate environment is putting increasing pressure on institutional investors, especially insurance companies that have sold products with minimum guaranteed returns, and pension funds that are under funded, to enhance portfolio returns by investing in riskier assets, noted the analytic chapters of IMF's flagship Global Financial Stability Report (GFSR).

Most institutional investors are for now accepting lower returns rather than taking on more risks. But if interest rates in advanced economies stay low for an extended period, these investors will be under increasing pressure to take on more investment risk, as their financial situation becomes increasingly unfavorable, noted the report.

"The structural trend of investing in emerging markets has accelerated following the crisis. But, with many 1st-time investors taking advantage of the relatively better economic performance of these countries, there is a risk of a reversal if fundamentals change," the report noted.

2 points worth underscoring are these, 1) that asset allocation by long-term real-money investors including pension funds and insurance funds is driven most strongly by positive growth prospects and falling risks in the recipient countries; interest rate differentials play a lesser role,and 2) is that sovereign asset managers may take on some of the longer-term risks that private investors now avoid, as heightened risk awareness and siff regulatory initiatives cause private investors to hold "safer" assets.

The Washington-based IMF and its sister agency World Bank were scheduled to open their annual meetings in late September. Stay tuned...