UK equity market returns are expected to increase from 5.0% to 6.0% in the coming year, although long-term returns are anticipated to be muted, according to the survey, which includes responses from 169 investment managers (the majority having institutional AuM above US$5 billion and retail AuM above US$1 billion).
While the outlook is perceived to be less rosy for equity markets elsewhere during 2013, with US and Australian equity return expectations being the lowest since the survey began in 2008, the US and China markets are expected to outperform the eurozone over the longer term.
Further, 35% of respondents in the eurozone still expect a sovereign debt default, as do 0.6% of US respondents, and 5.6% of those in Japan, while global economic imbalances, and inflation also being cited as key areas of concern for fund managers.
Equity volatility, meanwhile, is in the 15% to 20% range for major economies, which is lower than previous years but still high in comparison to longer-term averages.
Robert Brown, chairman of Towers Watson’s global investment committee, said: “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 stagnation
Real GDP growth expectations are expected to continue in a downward trajectory and range from just above 0% in the eurozone (0% in 2012) to 7.5% in China (8.0%) followed by 2.5% in Australia (3.0%), 2.0% in the US (2.0%), 1.0% in the UK (1.0%) and 0.9% in Japan (1.5%).
In a reflection of continued economic weakness, meanwhile, ten-year government bonds are expected to reach historic lows. In the UK, returns are expected to be 2%, down from 4% in the same survey conducted in 2011.
Brown concluded: "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.”
