Fund managers are confident that higher equity returns and positive, albeit modest, economic growth will manifest a continued global recovery, according to a survey conducted by professional services firm Towers Watson.

Despite a large degree of uncertainty expressed about bond markets, this year's findings show more optimism than managers expressed about the markets in last year's survey.

The global survey of investment managers indicates a strong West/East divide over the economic outlook for the next five years, with the West either having a delayed recovery or stagnation and the East (with the exception of Japan) expected to experience a boom.

The survey found that respondents expect stock markets to revert to historical return levels in the next ten years, while predictions about returns in 2010 are higher than these levels.

According to managers, anticipated returns on global equities in 2010 is ten per cent (compared with expectations of 6.7 per cent in 2009), with US, UK, Eurozone, Australian, Japanese and other Asian equity markets excluding Japan expected to deliver 9.0 per cent (8.8 per cent), 8.5 per cent (5.0 per cent), 9.0 per cent (5.5 per cent), 9.0 per cent (8.0 per cent), 9.0 per cent (5.0 per cent) and 14.5 per cent (10.0 per cent), respectively.

Expected equity volatility for 2010 is in the 15 per cent to 22 per cent range, substantially down from the high ranges seen in the past 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," says 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 stabilization and even to real economic growth in the next five years."

Most managers hold overall bullish views on emerging markets (87 per cent), public equities (74 per cent), commodities (71 per cent), private equity (49 per cent), high-yield bonds (46 per cent), real estate (43 per cent) and hedge funds (40 per cent) for the next five years.

However, for the same time horizon, most have fairly bearish views of returns on government bonds (77 per cent) and money markets (51 per cent).

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, there is consensus around a tightening of yields for corporate bonds versus their government equivalents, while the general view of long-term government debt around the world suggests a higher interest rate and/or inflationary environment. The survey indicates that managers expect real yields on ten-year inflation-linked bonds across all markets to be low by historic levels in 2010, and views appear anchored by central banks targets.

"It is not surprising that there is a high level of uncertainty in bond markets, given that we have limited experience of what happens when governments ease off the liquidity pedal," says Hess. "As a result, credit markets are likely to remain unpredictable for the foreseeable future responding more to triggers such as this rather than to economic data."


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