Only seven percent of investors believe in the goldilocks scenario of contained inflation and solid economic growth, following the upheaval in the Middle East, according to a survey of investors by Barclays Capital.
“Sixty percent thought that the biggest change in the investment outlook since December was the political upheaval in the Middle East,” said Piero Ghezzi, the head of emerging markets economics and FX research at Barclays Capital.
Those same investors said the most underpriced risk facing the financial market is the prospect of a hard landing in China, while most believe the Federal Reserve will tolerate higher inflation, with only 22 percent of investors predicting Fed tightening in 2011.
“Percentages reverse when it comes to the (European Central Bank) and the (Bank of England): only 22 percent of investors believe that economic fundamentals do not warrant tightening by the ECB and the BoE this year,” Ghezzi said.
No Euro Zone Break-Up
As investors prepare for this week’s EU heads of state summit, which is likely to produce a deal on the size of the European Financial Stability Fundsfinancial firepower, the survey indicated half of investors are preparing for a euro zone default.
“Only two percent of investors believe that the current European debt problems will end up in a full-blown crisis that could include the break-up of the euro,” Ghezzi said.
“Fifty percent of investors believe Greece, Ireland and Portugal will restructure/default within the next three years,” he added.
The survey found the majority of investors believe stocks and commodities will continue to outperform, with an oil price shock seen as the biggest risk for stocks.
“Among equity investors, more than 40 percent believe the main catalyst for a potential correction is an oil price shock; while 21 percent consider central banks’ exit strategies are the main risk” Ghezzi said.