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Financial crisis exposes investors to two opposing forces: IMF

09-14-2011 08:42 BJT

WASHINGTON, Sept. 13 (Xinhua) -- The global financial crisis and its aftermath expose real-money investors to two opposing forces, which may interact with recent regulatory initiatives in a way that carry risks to financial stability, the International Monetary Fund (IMF) warned on Tuesday.

On the one hand, 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 on Tuesday prior to its upcoming annual meetings.

On the other hand, 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 underfunded, 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 so far accepting lower returns rather than taking on more risks. But if interest rates in advanced economies stay low for an extended period, such 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. However, with many first-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.

Two points worth underscoring are as follows: One is 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. The other is that sovereign asset managers may take on some of the longer-term risks that private investors now avoid, as heightened risk awareness and regulatory initiatives push private investors to hold "safer" assets, Sun Tao, an IMF economist and co-author of the report, told Xinhua Tuesday.

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

 

Editor:Zhang Rui |Source: Xinhua

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