The findings are in contrast to last year’s survey when managers expected the recovery to remain on track and were bullish on public equities and emerging markets.
The survey, conducted at the end of 2011, reveals investment managers’ renewed concerns about recession and financial risks, driven by slower-than-expected economic recoveries in most developed markets and nervousness around the potential implications of the Euro zone sovereign debt crisis. Respondents again noted the Euro zone crisis as the main risk to global economic stability, highlighting an expected slide into recession in some countries, including the UK, during 2012 and the prospect of sovereign default.
They view Greece as being the most likely to default, necessitating debt rescue and restructuring, followed by Portugal, while they expect contagion to other Euro countries as unlikely.
The managers expect U.S. economic prospects to continue improving, although slower than the historical average, while Japan is expected to recover from last year’s tsunami-induced recession to maintain moderate growth in the next few years. While most managers expect China to grow at a slower pace, albeit robust and sustainable, some suggest that it may retreat modestly in terms of economic competitiveness. Many managers view the U.S. as the region with the most rewarding investment opportunities in 2012.
In contrast to last year, managers expect more modest equity returns in 2012, with significant downside risks, but have particularly depressed expectations for the U.K. and Euro zone. In addition, they anticipate equity returns to remain muted over the long term, likely below the historical average. They expect equity markets in 2012 to deliver returns of 8% in the U.S. (10% in 2011); 5% in the U.K. (10%); 6% in the Euro zone (7%); 7% in Australia (10%); 5% in Japan (6%); and 7.8% in China (10.5%).
Expected equity volatility for 2012 is in the 15% to 25% range, somewhat higher than longer-term averages. Despite ongoing economic uncertainty, most managers hold overall bullish views for the next five years on emerging market equities (75% vs. 85% in 2011), public equities (72% vs. 79%) and private equity (55% vs. 54%). For the same time horizon, the majority remains overall bearish on nominal government bonds (77% vs. 79%) and money markets (43% vs. 46%). A significant shift is the rise in managers now feeling bullish about commodities (56% vs. 35% in 2011) and high-yield bonds (59% vs. 34%).
Turning to five-year views on bonds, most managers (63%) still hold overall bullish views on emerging market debt, although down from 76% in 2010 and most (77%) remain bearish on the prospects for nominal government bonds. Most managers hold neutral or negative views on the prospects for inflation-linked government bonds (79%), while high-yield bonds are viewed more positively (59% are bullish).
The survey includes responses from 114 investment managers (with AuM of $7.8 trillion for institutional investors and $1.9 trillion for retail investors).