Fund managers are bullish about the prospects for public equities and emerging markets in 2011, but have bearish views of nominal government bonds according to a survey of investment managers conducted by Towers Watson.

The firm said the survey of 141 investment managers, conducted at the end of 2010, indicates that low central bank rates and mild inflation will continue to stimulate economic growth, helping to avoid a double dip recession and feed the global recovery. Investment managers highlighted unemployment as a major challenge for some developed economies, but saw it improving during the year.

Two main risks were highlighted; the likelihood of sovereign debt default in the Euro zone, and continuing economic stagnation in Japan.

In addition, Towers Watson said there was a consensus on the continuing West/East divide theme, with managers expecting increasing competitiveness from emerging economies and persistent boom conditions in China, while most Western economies have a slow economic recovery. Managers also expected equity returns to be lower over the next decade than the historical average, while predictions about returns in 2011 varied widely by market.

According to managers, anticipated returns on global equities in 2011 will be 10%, with other equity markets expected to deliver 10% in the U.S.; 10% in the U.K.; 7.% in the Euro zone; 10% in Australia; 6% in Japan; and 10.5% in China. Towers Watson said expected equity volatility for 2011 is in the 17% to 22% range, somewhat higher than longer-term averages.

Global head of investment at Towers Watson Carl Hess said the results indicate that the march towards recovery is continuing, 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, Hess said.

“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.”

The survey indicates that short-term government rates are expected to remain low in 2011, except for in Australia and China, but are forecast to trend up over the next ten years. Long-term government bond yields are expected to be moderate in 2011, but rise during the next ten years. In contrast to last year managers were expecting real yields on ten-year inflation-linked bonds across all markets to start rising in 2011, setting a trend for the next decade.

“After two years of very easy monetary policy and of quantitative easing in the US and UK, monetary policy is set to slowly return to more normal conditions.

“While markets anticipate a gradual increase in policy rates, uncertainty around the timing and the extent of rate hikes will be a dominant source of uncertainty and market volatility,” said Hess.

Share Story: