March 2011

FUND MANAGERS OPTIMISTIC: forecasting equities

eyeAt the end of 2010, fund managers were optimistic about the 2011 outlook for public equities and emerging markets, despite potentially higher volatility. But the likelihood of sovereign debt default in the Euro zone and continuing economic stagnation in Japan still raise concerns. A survey of investment managers carried out by consultancy Towers Watson, conducted at the end of last year, found that although fund managers were bullish in their forecast for public equities and emerging markets this coming year, they expected equity returns over the next ten years to be lower than the historical average. The predictions specific to 2011 varied widely by market, the firm said, but respondents were in agreement that there will be more volatility than in 2010. Towers Watson said the managers anticipated returns on global equities in 2011 to be 10.0%, this was the same as the 2010 forecast. Regarding other equity markets, the respondents expected the US to deliver 10%, the UK 10% and the Eurozone 7%. Last year’s prediction for Eurozone returns was 9%. China’s market was forecast to return 10.4% - a significant difference from the 14.5% managers anticipated it returning in 2010. Expected volatility within equity markets was in the 17% to 22% range, which Towers Watson said was somewhat higher than longer term averages. Carl Hess, global head of investment at Towers Watson, said: "This group of investment managers indicates that we continue on the path to recovery, but that it will be volatile and patchy depending on the market. Established Western markets will continue to lag the emerging markets on most measures, with the Euro zone and Japan expected to have the worst headwinds, in contrast to continuing rapid growth in China and other developing markets. There is sustained optimism from last year reflected in, among other things, an increase in the expected propensity of investors to take risk in 2011 and managers' commensurate bullishness about risky assets. A further indication of optimism is the view that all economies are expected to have moderate growth in 2011 as well as during the next ten years, supported by loose central bank monetary policies. The notable exception to moderate growth is China, where real GDP growth is expected to be around 9% this year, falling to 7.5% during the next ten." Most managers, 85%, held overall bullish views for the next five years on emerging market equities. Of the respondents, 79% were bullish on the five-year outlook for public equities – a sharp contrast to the 49% that held this view last year. ©2011 funds europe

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