Managers cut bullish stance on commodities

Investment managers generally maintained the bullishness they felt last year about public equities for 2011, but their optimism about commodities this year halved, according to a survey by consultants Towers Watson

Managers who responded to the poll conducted late last year are broadly as bullish over five years on emerging market equities (85% expressing optimism), and on public equities generally (79%) as they were a year ago.

But the proportion expressing optimism on commodities slumped from 71% going into 2010, to 35% for 2011.

Only 54% are bullish on private equity, and 49% on real estate. Some 46% are now neutral on hedge funds.

In fixed income markets, most bullishness is held towards emerging market debt, while bearishness prevails towards prospects for nominal government bonds.

They expect Chinese equities to outstrip developed markets again this year, with the 10.5% predicted from Shanghai topping predicted returns from markets globally and in the US, UK, Australia.

Returns from share markets in these three advanced economies will all increase marginally year on year to 10%, managers said, while China’s will fall sharply from 14.5% in 2010.

Returns will fall, year on year, in the Eurozone (to 7%) and Japan (to 6%), according to the 141 investors, managing $14.4trn.

They expect shareholders will have to live with slightly higher volatility, of 17% to 22%, this year.

Carl Hess, Towers Watson’s global head of investment, said: “Established Western markets will continue to lag the emerging markets on most measures, with the Eurozone and Japan expected to have the worst headwinds, in contrast to continuing rapid growth in China and other developing markets.”

The respondents predicted moderate GDP growth in most markets except China, where real economic expansion of 9% in 2011 is expected to fall to 7.5% during the next 10 years.

The managers feel low central bank rates and mild inflation will keep fuelling economic growth and avoiding another recession.

Managers expect real yields on ten-year inflation-linked bonds across all markets to start rising in 2011, setting a trend for the next decade.

Unemployment will be lower this year in Australia, Japan and China – around 5% – than in the US, UK and Eurozone, where 7.8% to 9.8% of working age citizens will be jobless.

The managers Towers Watson polled foresee crude oil at $93 per barrel this year, and around $103 a barrel in the next decade.

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