Fund managers have turned significantly more cautious about the prospects for world growth and investment returns, according to a global survey of investment managers conducted by professional services firm Towers Watson.
Managers expect US economic prospects to continue improving, although slower than the historical average, while Japan is expected to recover from last year’s tsunami-induced recession to maintain moderate growth in the next few years. China is seen to grow at a slower pace, if robust and sustainable, and some suggest it may retreat modestly in terms of economic competitiveness. Many managers view the US as the region with the most rewarding investment opportunities in 2012.
The US has managed to provide tax and monetary incentives to help consumers and investors, but these cannot continue indefinitely. “If the economy doesn’t develop some of its own momentum and unemployment doesn’t reduce, 2012 and 2013 could be very challenging particularly as much of the current stimuli would have run its course,” noted Brown.
In contrast to last year, managers expect more modest equity returns in 2012, with significant downside risks, but have particularly depressed expectations for the U.K. and Euro zone.
In addition, they anticipate equity returns to remain muted over the long term, likely below the historical average. They expect equity markets in 2012 to deliver returns of 8.0% in the U.S. (10.0% in 2011); 5.0% in the U.K. (10.0%); 6.0% in the Euro zone (7.0%); 7.0% in Australia (10.0%); 5.0% in Japan (6.0%); and 7.8% in China (10.5%).
Expected equity volatility for 2012 is in the 15% to 25% range, somewhat higher than longer-term averages. Despite ongoing economic uncertainty, most managers hold overall bullish views for the next five years on emerging market equities (75% vs. 85% in 2011), public equities (72% vs. 79%) and private equity (55% vs. 54%).
For the same time horizon, the majority remain overall bearish on nominal government bonds (77% vs. 79%) and money markets (43% vs. 46%). A significant shift is the rise in managers now feeling bullish about commodities (56% vs. 35% in 2011) and high-yield bonds (59% vs. 34%).
Said Brown: “While it would be a stretch to say this bullishness about risk assets is misplaced optimism, we would still caution investors, particularly pension funds, against taking on more risk, even in light of ongoing market rallies. The move into positive territory for many markets this year is helpful but largely reflects central bank liquidity and may not prove sufficiently sustainable to justify a strategic move back into risk assets or indicate a cyclical recovery. “