According to managers, anticipated returns on global equities in 2011 will be 10%, the same as in 2010, with other equity markets expecting to deliver 10.0% (9.0% in 2010) in the U.S.; 10.0% (8.5%) in the U.K.; 7.0% (9.0%) in the Euro zone; 10.0% (9.0%) in Australia; 6.0% (9.0%) in Japan; and 10.5% (14.5%) in China. Expected equity volatility for 2011 is in the 17% to 22% range, somewhat higher than longer term averages.
“This influential 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,” said Carl Hess, Towers Watson’s global head of investment. “Established Western markets will continue to lag the emerging markets on most measures, with the Eurozone 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 10 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 10.”
Most managers hold overall bullish views for the next five years on emerging markets (85% vs. 87% in 2010), public equities (79% vs. 74%), private equity (54% vs. 49%) and real estate (49% vs. 43%). However, for the same time horizon, the majority have turned neutral on hedge funds (46%) and bearish on money markets (46%). A significant shift from last year is a drop from 71% to 35% this year of managers feeling bullish about commodities, with 56% having a neutral stance.
Turning to bonds, there is a wide dispersion of views, which indicates significant uncertainty about the level and direction of yields on both short- and long-term corporate and government securities. However, most mangers (76%) hold overall bullish on emerging market debt, while most (79%) have bearish views on the prospects for government bonds. Most managers hold neutral views on the prospects for inflation-linked government bonds (48%) and on high-yield bonds (41%).
The survey indicates that short-term government rates are expected to remain low in 2011, except for Australia and China, but are expected 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 expect real yields on 10-year inflation-linked bonds across all markets to start rising in 2011 setting a trend for the next ten.
“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 over the next years,” said Hess. “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.”
Other key findings from the survey include:
- Real GDP growth expectations in all markets for 2011 range from 1.5% in Japan to 8.9% in China, with the U.S., U.K., Euro zone and Australia having figures of 3.0%, 2.0%, 1.8% and 3.2% respectively. Managers’ 10-year GDP growth forecasts broadly match their one-year view and are below historical trends.
- In 2011, managers expect unemployment to remain higher than in the recent past: 9% in U.S., 7.8% in the U.K., 9.8% in the Euro zone, but suggest it will be a watershed year for the jobs market. They are expecting improvement in all markets during the next ten years, although some, mainly Western countries will stay fairly high by historical averages. They expect unemployment to be lower in Australia (5.0%), Japan (5.0%) and China (4.4%) and to remain low for the next ten years.
- The managers’ consensus is that crude oil is expected to reach US$92 a barrel this year (US$80 last year) and US$102 a barrel in the next ten years.
“Analyzing headline inflation over recent years has been complicated by the transitory effects of commodity prices, FX movements and changing tax rates,” said Hess. “While we remain concerned about potential extreme outcomes for inflation in developed markets, policy interventions have reduced the likelihood of these outcomes. While loose monetary policy over the past few years was warranted to fight deflationary pressures and liquidity shortage, it will be important to see if central bankers show the same level of determination in fighting a rise in inflation expectations as the economic recovery proceeds. Future inflation remains dependent on sensible monetary policy decisions, but the normalisation of financial conditions simplifies the task of central bankers somewhat.”
