Managers forecast double-digit equity returns

Despite renewed uncertainty over bond markets and recent jitters in stock markets around the world, institutional investment managers are confident enough in an economic recovery to expect returns on global equities of 10%, a recent survey reveals.

Towers Watson’s 2010 Global Survey of Investment and Economic Expectations of 98 investment managers finds that respondents expect an East/West divide regarding a recovery, with the West either having a delayed recovery or stagnation and the East (with the exception of Japan) expected to experience a boom.

Managers anticipate returns of 10% on global equities in 2010 — compared with expectations of 6.7% in 2009 — with expected equity volatility for 2010 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,” says 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 stabilization and even to real economic growth in the next five years.”

A strong majority (87%) of managers favour emerging markets, while 74% are bullish on public equities, 71% on commodities, 49% on private equity, 46% on high-yield bonds, 43% on real estate and 40% on hedge funds for the next five years. However, government bonds conjure up bearish sentiment for 77% of respondents, while 51% are bearish on money markets.

The topic of bonds elicited a wide dispersion of views, indicating significant uncertainty about the level and direction of yields on both short- and long-term corporate and government securities. However, most respondents found a consensus regarding 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. 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,” says 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; • unemployment is expected to remain high in 2010, but improve in all markets during the next 10 years; • all marketplaces have reached the bottom of the housing market with the exception of the U.S., which is expected to do so this year; and • crude oil is expected to reach US$80 a barrel this year and US$95 a barrel in the next 10 years.

“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. “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.”

(02/17/10)