Despite an uneasy feeling about the bond markets, investment managers remain optimistic about the potential for a continued global recovery in 2010, says Towers Watson.

A survey of fund managers by the consultancy found that there remains confidence in higher equity returns and positive economic growth. The optimism theme is stronger than managers expressed about the markets last year.

There is, however, a strong West/East divide over the outlook for the next five years, with the West expected to have a delayed recovery or stagnation, and the East, excluding Japan, experiencing a boom.

Survey participants expect stock markets to return to historical levels in the next ten years, and predictions for 2010 returns are even higher than this.

A ten per cent return is anticipated on global equities (6.7% in 2009), and the US, UK, Euro zone, Australian, Japanese and other Asian equity markets are expected to see 9%, 8.5%, 9%, 9%, 9% and 14.5% respectively. 2009's results were 8.8%, 5%, 5.5%, 8%, 5% and 10%. Volatility expectations for 2010 are set between 15% and 22%, far lower than the high ranges seen in the last 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," said 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 stabilisation and even to real economic growth in the next five years."

Managers tend to be bullish on emerging markets (87%), public equities (74%), commodities (71%), private equity (49%), high-yield bonds (46%), real estate (43%) and hedge funds (40%) for the next five years. Bearish views are taken on government bonds (77%) and money markets (51%).

The survey was conducted at the end of 2009, and includes responses from 98 investment managers.

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