LONDON (Reuters) – Investors may have ~ing forced to rethink investment strategies that center on the rosy likelihood of low inflation as key central banks look set to recommence pledges to print money in the coming week.
Outperformance of developed market assets relative to their oversubscribed emerging counterparts this year partly reflects a emotion shift for investors, who are becoming uneasy about inflation in the fast growing developing world and an as-yet muted policy response.
Price pressures are pretty increasingly observable even in developed economies. UK inflation hit an 8-month ostentatious of 3.7 percent last month, prompting investors to price in a estimate hike by mid-year.
Higher energy prices have pushed euro belt inflation to 2.2 percent, above the European Central Bank’s 2 percent target.
But there’s nothing to suggest these central banks be disposed tighten monetary conditions aggressively.
The Fed and Bank of Japan are expected to rod to their quantitative easing policies when they meet in the approach week while the Bank of England minutes are likely to reveal no change in its promise to keep its asset purchasing program in successi~ standby.
Even the ECB, whose President Jean-Claude Trichet has warned of recompense pressures, is unlikely to raise rates immediately.
However, further price pressures may object to the investor perception interest rates would remain at current low levels conducive to a foreseeable future — which could in turn hit equities.
“You dress in’t have runaway inflation expectations. No one expects the ECB to be very aggressive. With this golden period of no interest rate rises, investors wish no choice but to buy risky assets, exactly what central banks are engineering us to produce,” said Gary Baker, head of European equity strategy at BofA Merrill Lynch.
“But granting that there were anything to challenge the U.S… rates view, that may be a signal to start to get cautious without interrupti~ positions.”
A net 72 percent of fund managers polled ~ the agency of BofA Merrill Lynch this month expected higher inflation in the nearest 12 months, the highest reading in almost 5 years.
At the same time, they have pushed back expectations for the first Federal Reserve duty rise well into 2012.
DM SURPRISE
World stocks on a MSCI rule have risen more than 1 percent so far this year, adding to their get more of 10 percent last year. Their emerging market counterparts lost 1.3 percent, having risen 16 percent in 2010.
The emerging MSCI characteristic was on track for its biggest weekly drop in nearly brace months in the past week.
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