A survey finds that fund managers are more optimistic about the prospects for equity returns in most markets, while remaining concerned about world growth and medium-term government bonds.
The global survey conducted by Towers Watson shows that 44% of managers believe that the investment strategies of their institutional clients will become more aggressive next year, up from one-third of managers in 2013.
During the next five years, the majority of managers expect the world’s largest economies to experience mild growth, with the exception of the eurozone where they expect unemployment to remain in the low double digits in the short term and at a relatively high 9.5% in the medium term.
In contrast to last year, managers expect better equity returns this year in most markets with the exception of the United States and China.
Most managers in the survey hold overall bullish views for the next five years on emerging market equities (76% versus 83% in 2013), public equities (78% versus 78%) and private equity (59% versus 53%).
For the same time horizon, the majority remain overall bearish on nominal government bonds (81% versus 80% in 2013), investment-grade bonds (58% versus 47%), high-yield bonds (42% versus 39%) and inflation-indexed government bonds (42% versus 47%).
The survey shows that managers expect unemployment to remain a tough challenge for some Western economies, especially for the eurozone countries implementing fiscal austerity measures.
According to managers, expansionary monetary policies are expected to hold in 2014, with exceptionally low interest rates in some Western economies, but to gradually tighten in the years ahead. Inflation is viewed as a moderate near-term risk, with some very concerned about long-term inflation risk in both the U.S. and Europe.
Turning to 10-year government bond yields, managers predict yields stabilizing at historic lows in 2014 reflecting a mix of economic strengthening in key markets but with continued central bank asset purchases.
“Managers are bearish about developed-market government bonds and investment grade bonds, even with expectations that interest rates will not move much over the next year,” says Matt Stroud, Towers Watson’s head of investment strategy, Americas. “Investors may find these asset classes less attractive due to current rate levels and central bank action, though respondents were also bearish on high yield, even more so than money market, perhaps reflecting the deterioration in valuation as well as terms of certain ‘covenant-lite’ and ‘payment-in kind’ deals during 2013.”
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