Investment managers optimistic about markets in 2010
Wednesday 17th February 2010
By Mike Jones
Fund managers are confident that higher equity returns and positive, albeit modest, economic growth will manifest a continued global recovery, according to a survey conducted by global professional services firm Towers Watson.
Despite a large degree of uncertainty expressed about bond markets, this year’s findings show more optimism than managers expressed about the markets last year.
The global survey of investment managers indicates a strong West/East divide over the economic outlook for the next five years, with the West either having a delayed recovery or stagnation and the East (with the exception of Japan) expected to experience a boom. The survey found that respondents expect stock markets to revert to historical return levels in the next 10 years, while predictions about returns in 2010 are higher than these levels.
According to managers, anticipated returns on global equities in 2010 is 10% (compared with expectations of 6.7% in 2009; median value, same below), with US, UK, Euro zone, Australian, Japanese and other Asian equity markets excluding Japan expected to deliver 9.0% (8.8%), 8.5% (5.0%), 9.0% (5.5%), 9.0% (8.0%), 9.0% (5.0%) and 14.5% (10.0%), respectively. Expected equity volatility for 2010 is in the 15% to 22% range, substantially down from the high ranges seen in the past two years.
"The overall picture we get from this influential group is one of recovery, with established Western markets lagging the emerging markets on most measures," said Carl Hess, global head of investment at Towers Watson.
"In addition, there is greater optimism than last year reflected in, among other things, an increase in the expected propensity of investors to take risk in 2010 and managers’ commensurate bullishness about risky assets. A further indication of optimism is the broadly held view in all markets except Japan, that government policies on the economy will be conducive to market stabilisation and even to real economic growth in the next five years."
Most managers hold overall bullish views on emerging markets (87%), public equities (74%), commodities (71%), private equity (49%), high-yield bonds (46%), real estate (43%) and hedge funds (40%) for the next five years. However, for the same time horizon, most have fairly bearish views of returns on government bonds (77%) and money markets (51%). The survey was conducted at the end of 2009, and includes responses from 98 investment managers who collectively have approximately US $13.3trillion assets under management.
Turning to bonds, there is a wide dispersion of views, which indicates significant uncertainty about the level and direction of yields on both short- and long-term corporate and government securities. However, there is consensus around a tightening of yields for corporate bonds versus their government equivalents, while the general view of long-term government debt around the world suggests a higher interest rate and/or inflationary environment. The survey indicates that managers expect real yields on 10-year inflation-linked bonds across all markets to be low by historic levels in 2010, and views appear anchored by central banks targets.
"It is not surprising that there is a high level of uncertainty in bond markets, given that we have limited experience of what happens when governments ease off the liquidity pedal," said Hess. "As a result, credit markets are likely to remain unpredictable for the foreseeable future responding more to triggers such as this rather than to economic data."
Other key findings from the survey include:
* Real GDP growth expectations in all markets for 2010 range from 1.2% in Japan to 7.0% throughout the rest of Asia, with the US, UK, Euro zone and Australia having figures of 2.5%, 1.7%, 1.5% and 3.0% respectively. Managers’ 10-year GDP growth forecasts broadly match their one-year view and are below historical trends;
* Managers expect unemployment in 2010 to remain higher than in the recent past, but improve in all markets during the next 10 years, although some countries will stay fairly high by historical averages. They forecast unemployment to peak in Western, developed markets this year (10.5% in US, 8.5% in the UK, 10.7% in the Euro zone), but indicated that this has already occurred in Australia, Asia and Japan;
* All marketplaces have reached the bottom of the housing market with the exception of the US, which is expected to do so this year, according to the respondents;
The managers’ consensus is that crude oil is expected to reach US $80 a barrel this year and US $95 a barrel in the next 10 years, consistent with last year’s prediction when they saw it moving towards US $80 a barrel in 2012.
"While we do not foresee an imminent return to high and persistent inflation within the developed world during the next few years, when some inflation does return we expect central banks may find it difficult to adequately control the inflationary pressures that emerge," said Hess.
"In addition, if developed economies recover robustly and credit creation returns, inflationary pressures will emerge faster than we expect. Clearly, another crisis could emerge at any time and the current state of the global economy means a near-term shock would be particularly deflationary. However, policymakers have shown the ability and willingness to do whatever it takes to avoid the pain of an entrenched debt-deflation spiral, so persistent deflation is unlikely."
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