Here's why investors must brace for the end of 'easy money'

Fears rise over higher interest rates, tail risk.

According to Allianz Global Investors, institutional investors across the world are most concerned about tail risk
and rising interest rates as they begin to position their portfolios for the end of ultra-loose monetary policy in developed markets.

That is one of the key findings from Allianz Global Investors’ survey of nearly 400 senior decision makers at institutional investors from 41 countries around the world.

While only a minority of respondents expect interest rates to rise towards their long-term historical averages before 2015, rising interest rates and tail risk are seen as most prevalent economic risk factors affecting investment performance over the next three years.

A quarter of investors see rising interest rates as a “great risk” and further 31 per cent see this as a “considerable risk”.

Likewise, 20 per cent of respondents describe tail risk as great and an additional 39 per cent view it as considerable.

Low interest rates are also likely to increase near-term GDP growth according to nearly 60% of the respondents, but central banks’ monetary policy also has its downsides. 53% of Asia Pacific respondents expect inflation to rise and anticipate an increase in systemic risk, and 42% foresee financial market getting unstable as a consequence of the ultra-loose monetary policy of recent years.

Investors also recognise the double-edged nature of loose monetary policy with 59 per cent of the respondents believing that the actions of central banks have stimulated short-term GDP growth while nearly as many see an increase in inflation (57 per cent), an increase in systemic risk (55 per cent) and a deterioration in the health of the retirement savings system (54 per cent) as side effects.

Over two thirds of investors (68 per cent) believe that the monetary policies of developed nations in the past five years have increased the risk of abnormal price distortions in the fixed income market.