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Robert Brown, chairman of Towers Watson’s global investment committee

Fund managers turn more optimistic for 2013, says Towers Watson

Fund managers have turned more optimistic about the prospects for equity returns while remaining negative on world growth and medium-term government bonds, according to a global survey of investment managers conducted by professional services firm Towers Watson.

The survey also highlights the most important issues investment managers expect to face in 2013 as government intervention, global economic imbalances and sovereign debt defaults, with inflation being a significant concern in the next five years.
Robert Brown (pictured), chairman of Towers Watson’s global investment committee, says: “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. In the US, growth is now well above its trend because financial conditions are very easy and those sectors that respond most to low interest rates have improved balance sheets. This is not the case in Europe where those sectors, typically households and construction, are less able to respond to this stimulation. 

“Growth in China has also improved, driven by modest amounts of monetary stimulation and increases in government investment spending. Other emerging regions have been slower to pick-up, although this may just reflect a small lag as the improvements in external demand and production work their way through into improvements in domestic incomes. So while these are positive signs which will have influenced managers’ outlook for 2013, a sustained global economic recovery is likely to remain fragile, set as it is against the unavoidable situations of extreme indebtedness in the Western world; on-going double- and triple-dip recessions; and weak and uncertain prospects for growth in many markets.”
The global survey shows that guarded optimism has returned to this influential group of investment managers, witnessed by their view that institutional investors’ are expected to either modestly increase risk or keep their portfolio risk level the same in 2013. The survey, which includes responses from 169 investment managers (the majority having institutional AuM above USD5bn and retail AuM above USD1bn) indicates that a significant number of them still expect a sovereign debt default in the Eurozone and continuing weak fiscal situations in the US, UK and Japan.
Brown says: “Eurozone countries face highly political long-term structural reforms, as well as fiscal austerity, which are proving difficult to implement, pushing out further any real global recovery. Politics have become increasingly enmeshed in the financial world since the global economic crisis began and investment managers have again identified this as the top issue for them. There are some positive economic signals coming out of the US which, even though driven largely by government policies, seem to be reflected in managers’ view that the US is the region with the most rewarding investment opportunities in 2013, followed by China, the Eurozone and Frontier markets. While government policies are clearly intended to stimulate growth and address the massive US fiscal deficit, we see the risk skewed towards deflation rather than inflation. That said, the housing market still remains key to a US recovery if the headwind of negative equity can be overcome.”
In contrast to last year, managers expect better equity returns in 2013 in most markets than they did in 2012, with the exception of the US and Australia, where equity return expectations are the lowest they have been since the survey started in 2008. In addition, managers anticipate equity returns to remain muted over the longer term, but indicate a preference towards US and China and away from the Eurozone. They expect equity markets in 2013 to deliver returns of 7.0 per cent in the US (compared to 8.0 per cent in 2012); 6.0 per cent in the UK (5.0 per cent); 7.0 per cent in the Euro zone (6.0 per cent); 6.0 per cent in Australia (7.0 per cent); 6.0 per cent in Japan (5.0 per cent); and 10 per cent in China (7.8 per cent).
The survey also shows that expected equity volatility for 2013 is in the 15 per cent to 20 per cent 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 per cent vs. 75 per cent in 2012), public equities (78 per cent vs. 72 per cent) and real estate (57 per cent vs. 48 per cent). For the same time horizon, the majority remain overall bearish on nominal government bonds (80 per cent vs. 77 per cent in 2012), money markets (47 per cent vs. 43 per cent), investment-grade bonds (47 per cent vs. 29 per cent) and inflation-indexed government bonds (47 per cent vs. 47 per cent).
Brown says: “Volatile markets and heightened risk awareness continue to make asset allocation very challenging as investors balance priorities like 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 what to do about it when the goal for many funds is to reduce risk overall and diversify from existing equity holdings. So many funds are buying fewer bonds than before, and those which are considering adding risk to their investment portfolios are most often diversifying into alternative assets rather than simply buying equities.”
According to the study, real GDP growth expectations for 2013 continue a downward trend and range from just above 0 per cent in the Euro zone (0 per cent in 2012) to 7.5 per cent in China (8.0 per cent) followed by 2.5 per cent in Australia (3.0 per cent), 2.0 per cent in the US (2.0 per cent), 1.0 per cent in the UK (1.0 per cent) and 0.9 per cent in Japan (1.5 per cent). With the exception of China, managers’ ten-year GDP growth forecasts are slightly above their one-year view but are below historical trends. 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 2013, 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 US and Europe.
Turning to ten-year government bond yields, in 2013 managers predict the continuation of a downward movement of yields to historic lows reflecting persistent economic weakness and continued central bank asset purchases. Predicted yields on ten-year government bonds have fallen in every market since the 2011 survey, with the US falling from 3.8 per cent to 2.0 per cent, mirrored by the UK (4.0 per cent to 2.0 per cent), the Eurozone (3.5 per cent to 2.0 per cent), Australia (6.0 per cent to 3.3 per cent), Japan (1.6 per cent to 1.0 per cent) and China (5.0 per cent to 3.8 per cent).

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