KEY BISCAYNE, Fla. Inflation was cited as the main concern of institutional investors attending a Barclays Capital economic conference in late February.
A large majority of the respondents, 86%, expected the core Consumer Price Index, which excludes volatile food and energy prices, to end 2008 running at a pace above 2%, which is generally regarded as the top of the Federal Reserves comfort zone for inflation. Regarding overall CPI inflation, which includes energy and food, the consensus of 59% of the respondents was worrisome, above 2.5% and as high as 4.5%.
Most respondents in the group, 41%, said the core CPI will be between 2% and 2.5% by late 2008; 34% said 2.5% to 3%.
Inflation is the key component to what is happening in the economy, said Ralph Segreti, Barclays director and global inflation-linked product manager, who presented the results of the survey Wednesday. Barclays polled more than 200 asset managers, hedge fund executives and pension plan sponsors who attended Barclays annual global inflation-linked conference in Key Biscayne, Fla., on Feb. 24-26. Barclays Capital is the investment banking division of Barclays Bank PLC, London.
The conference covered a range of issues, including monetary policy, new asset classes, pensions and corporate liability as well as the role of sovereign wealth funds.
Despite the outlook for rising inflation, 57% of the respondents expected the Federal Reserve to further lower the funds rate this year as the economy slows down, in large part due to the impact of the housing sector downturn. The respondents expected the overnight interbank lending rate would end 2008 at 2% or 2.5%, down from 3% currently. Another 17% had a dimmer view and said the weak economy will force the Fed to lower the funds rate below 2%.
The results of the survey were a little more pessimistic than we had expected, said Mr. Segreti, adding that 43% of the audience at the conference believes the U.S. stagflation accompanied by global growth was the most likely economic scenario for 2008, followed by 22% who expected a global recession.
Pushing inflation are many commodities trading at record prices including the ounce of gold headed for $1,000 but 44% of the respondents expected yet more gains in crude oil, which they saw holding above $100 a barrel through 2008.
Commodities are expected to climb further, with 31% of the managers polled saying it will be the best performing asset class in 2008, followed by 23% seeing cash as the best asset class, 15% for equities and 10% for inflation-linked bonds.
As the result of the inflationary pressures, 68% of the respondents said they were increasing their allocations to Treasury inflation-protected securities, while 72% said they already had diversified into emerging markets inflation-linked investments in 2007. Answering that trend, Barclays just launched the Universal Government Inflation-Linked Bond index, which tracks 19 developed and emerging markets.
But Larry Kantor, head of research at Barclays Capital, said these were positive signs for the global economic outlook.
Base metals and energy prices continue to go up, meaning demand is not that weak, Mr. Kantor said.