(February 19, 2013) — Fund managers have turned more optimistic about the future of equity returns while remaining negative on world growth and medium-term government bonds, according to a global survey of investment managers by Towers Watson.
“During the last quarter of 2012, when this survey was held, the move back to policy easing and consequent improvement in global financial conditions improved growth prospects, with the US and China responding the most,” says Matt Stroud, head of strategy and portfolio construction at Towers Watson. The firm’s research suggests that a significant number of respondants still expect a sovereign debt default in the Eurozone and continuing weak fiscal situations in the US, the UK, and Japan.
The global survey shows that guarded optimism has returned to fund managers, who have acknowledged that institutional investors are expected to either modestly increase risk or keep their portfolio risk level the same in 2013. In terms of volatility, the study demonstrates that expected equity volatility for 2013 is in the 15% to 20% range for major economies–somewhat lower than previous years, but still elevated compared to longer-term averages.
Most managers in the survey hold overall bullish views for the next five years on emerging market equities (83% vs. 75% in 2012), public equities (78% vs. 72%) and real estate (57% vs. 48%). For the same time horizon, the majority remains bearish overall on nominal government bonds (80% vs. 77% in 2012), money markets (47% vs. 43%), investment-grade bonds (47% vs. 29%) and inflation-indexed government bonds (47%, same as 2012).
Stroud adds in a statement: “Volatile markets and heightened risk awareness continue to make asset allocation very challenging, as investors balance priorities such as long-term de-risking, short-term market opportunities, rebalancing, and maintaining a strategic asset allocation mix. In terms of specific asset classes, we think that government bonds do not represent great value at the moment and that equities represent relatively better value. However, it is challenging to know how to respond when the goal for many funds is to reduce risk overall and diversify from existing equity holdings. As a result, many funds are buying fewer bonds than before, and those that are considering adding risk to their investment portfolios are most often diversifying into alternative assets rather than simply buying equities.”
With regard to 10-year government bond yields for 2013, managers predict the continuation of historic lows, reflecting persistent economic weakness and continued central bank asset purchases, Towers Watson asserts. Predicted yields on 10-year government bonds have fallen in every market since the 2011 survey, with the US falling from 3.8% to 2.0%, mirrored by the UK (4.0% to 2.0%), the Eurozone (3.5% to 2.0%), Australia (6.0% to 3.3%), Japan (1.6% to 1.0%) and China (5.0% to 3.8%).
An earlier market outlook report by Cambridge Associates echoes optimism over equities, recommending that institutional investors should consider overweighting emerging market equities–such as Chinese or Brazilian stocks–at the expense of US equities. “Today, emerging market equities offer the best risk-reward trade-off from a long-term perspective, particularly when compared with US equities,” said Celia Dallas, director of Investment Strategy Research at Cambridge Associates, a global provider of independent advisory services and research to institutional investors and private clients. “Within emerging market equities, most of the discount is concentrated in cyclical sectors such as financials and energy, while ‘defensive’ and consumer-oriented sectors like consumer discretionary, consumer staples, telecoms and utilities all look relatively expensive.”