Towers Watson: Rising optimism on equities, tempered by global growth

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Carl Hess: “Our central thesis is it is going to a bumpy ride”

Money managers are more optimistic about potential equity returns this year, but that optimism is guarded with negative views on world growth and medium-term government bonds, according to a survey of managers by Towers Watson.

The largest looming issues for managers are fiscal resolution in the U.S., and the European Central Bank's success in propping up the periphery, as a “significant” number of managers still expect a sovereign debt default in the eurozone, said Carl Hess, global head of investment, in a telephone interview.

Government intervention is dominating the economic landscape globally, and real GDP growth is expected to fall this year despite better equity returns expected.

U.S. equity returns are expected to be around 7% this year, down from a projected 8% last year. Expectations for the U.K. and Japan are 6% and the eurozone, 7%, each up one percentage point. China returns are expected at 10%, up from 7.8%.

But real GDP growth is somewhat stagnant for those economies from 2012. The 10-year growth numbers are only slightly higher than one-year forecasts, with the exception of China, and still below historic averages.

“Our central thesis is it is going to a bumpy ride” over the next several years, Mr. Hess said. “The immediate landscape looks all right, but the long-term problems are still there.”

The expected volatility for 2013 is down to 15% to 20%, but that level is still elevated from long-term averages. Managers are most bullish for the next five years on emerging markets equity, 83%, public equity, 78%, and real estate, 57%. The U.S. was seen as the region with the most rewarding investing opportunities in 2013, followed by China, the eurozone and frontier markets.

The most bearish areas over the next five years are nominal government bonds, 80%, money markets, 47%, investment-grade bonds, 47%, and inflation-indexed government bonds, 47%. The percentage of the most bullish and bearish areas all increased from 2012 with the exception of inflation bonds, which was flat.

Towers Watson surveyed 169 managers in the fourth quarter with the majority managing at least $5 billion in institutional assets under management.