Hedge fund managers predict gradual economic recovery

Hedge fund managers predict gradual economic recovery

Despite indications of economic recovery, concerns still run high about the direction of the economy and impending regulation, according to a RBC Capital Markets survey of 60 senior hedge fund executives conducted by the Economist Intelligence Unit.

Two-thirds (64 per cent) said it would take at least five years for corporate profit margins and/or returns on capital to reach pre-crisis levels, and managers expressed more confidence in the growth and stability of China’s capital markets than those in the US.

Two in five fund executives surveyed (42 per cent) expect a gradual recovery over the next year, with growth resuming at a below-trend rate over the following year. One-third (32 per cent) were more bearish, saying they did not expect a meaningful recovery for at least one year, followed by negligible growth at best. One in five (17 per cent) say they expected a prolonged period of global economic weakness lasting at least two years. Only seven per cent of those surveyed expected a sharp rebound in the next six months, with growth returning to previous levels over the next two years. 

Sixty two percent of the hedge fund managers believe that confidence is returning to their customers.

“Fund executives believe that full recovery will be a slow, difficult process,” says Marc Harris, co-head, global research, RBC Capital Markets. “However, one of the benefits of the current climate of anxiety and uncertainty is that it produces a creative tension that can help make markets. When you have both motivated buyers and motivated sellers, you have the potential for positive momentum in the markets.  The huge moves in the equity markets since March, in spite of recession in the broader economy, are proof of this.” 

Underscoring the executives’ concerns about recovery in the US, the hedge fund managers cited China’s capital markets as those in which they had the most confidence over the next two years in terms of growth and stability. Forty-two per cent ranked China’s markets first, followed by those of the US (35 per cent). Moreover, nearly one-quarter of fund managers (24 per cent) believe the US dollar could lose its reserve currency status within the next five years.

The survey also highlighted the renewed importance fund managers are placing on fundamentals. Respondents were asked which factors they assigned more weight now compared to two years ago, and the top answers were:

• The company’s ability to maintain adequate levels of cash or other sources of liquidity (61 per cent)
• The financial strength of the company (57 per cent)
• The company’s ability to mitigate the risks of extreme market conditions (48 per cent)

“It’s hard to overstate the impact of the credit crisis on the capital markets, even for seasoned professionals.  What we are seeing is a fundamental re-examination of traditional beliefs such as efficient market theory, the role of the U.S. dollar as the primary global reserve currency, and credit rating agencies,” says Richard E. Talbot, co-head, global research, RBC Capital Markets. “That said, the resiliency of the markets should not be underestimated. Past cycles have clearly shown that some of the greatest returns have been earned during times of uncertainty as asset prices bottom out and then climb a ‘wall of worry’. This is borne out by the strength of the markets during the past six months.”

Hedge fund managers have a low visibility about the macro environment. Nearly half (46 per cent) of those surveyed had little or no confidence in their ability to predict the direction of prices and rates in global financial markets (equity, debt, foreign exchange) over the next year, and 30 per cent lacked confidence in their ability to look out generally 12 to 24 months ahead. When asked which poses a greater threat to the performance of their portfolio over the next two years, fund managers were twice as likely to say deflation (47 per cent) compared to inflation (28 per cent).

Fund managers acknowledged that the regulatory landscape would change over the next two years, saying they expected higher capital requirements for providers of credit (85 per cent) new restrictions on both off-balance sheet activity (70 per cent) and derivatives contracts (68 per cent).

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