Fund managers are more cautious about the prospects for world growth and investment returns, according to a global survey of investment managers conducted by global professional services firm Towers Watson.
The findings are in contrast to last year's survey when managers expected the recovery to remain on track and were bullish on public equities and emerging markets.
"The global economic recovery remains as elusive and fragile as ever, set as it is against the unavoidable facts of extreme indebtedness in the Western world and weak and uncertain prospects for growth in most markets. The second half of 2011 was a reminder that these fundamentals hadn't gone away and have clearly influenced managers' outlook for 2012. As such this influential group of investment managers have shifted from expecting a continuing path to recovery and the avoidance of a double-dip recession in some markets, to anticipating a more volatile and patchy period defined by increased levels of risk, some growth and significantly lower returns," said Carl Hess, global head of investment at Towers Watson. "Their optimism from last year, and the year before, is replaced by a less sanguine view about investors' propensity to take risk in 2012, with managers' significantly reducing the returns they expect from risky assets. A further indication of the change in sentiment from the past two years is their view that most economies are expected to have significantly lower growth in 2012 than they had expected in prior years."
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The global survey, which was conducted at the end of 2011, reveals investment managers' renewed concerns about recession and financial risks, driven by slower than expected economic recoveries in most developed markets and nervousness around the potential implications of the Euro zone sovereign debt crisis. The survey, which includes responses from 114 investment managers (with assets under management of US$7.8 trillion for institutional investors and US$1.9 trillion for retail investors) again noted the Euro zone crisis as the main risk to global economic stability, highlighting an expected slide into recession in some countries, including the UK, during 2012 and the prospect of sovereign default. They view Greece as being the most likely to default, necessitating debt rescue and restructuring, followed by Portugal, while they expect contagion to other Euro countries as unlikely.
The managers expect U.S. 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. While most managers expect China to grow at a slower pace, albeit robust and sustainable, some suggest that it may retreat modestly in terms of economic competitiveness. Many managers view the U.S. as the region with the most rewarding investment opportunities in 2012.
"While there are some positive economic signals coming out of the U.S., driven largely by government policies such as tax incentives to help consumers and the Fed's highly accommodative monetary policy, 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. The policies are clearly intended to stimulate growth and address the massive U.S. fiscal deficit, however, they bring considerable political, and some inflationary, risk," Hess said.
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 percent in the U.S. (10 percent in 2011); 5 percent in the U.K. (10 percent); 6 percent in the Euro zone (7 percent); 7 percent in Australia (10 percent); 5 percent in Japan (6 percent); and 7.8 percent in China (10.5 percent). Expected equity volatility for 2012 is in the 15 percent to 25 percent 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 percent vs. 85 percent in 2011), public equities (72 percent vs. 79 percent) and private equity (55 percent vs. 54 percent). For the same time horizon, the majority remain overall bearish on nominal government bonds (77 percent vs. 79 percent) and money markets (43 percent vs. 46 percent). A significant shift is the rise in managers now feeling bullish about commodities (56 percent vs. 35 percent in 2011) and high-yield bonds (59 percent vs. 34 percent).
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