(Pictured: Tim Unger)
Institutional investors are expected to become more aggressive with their investments next year, according to their fund managers, as most equity markets remain positive and emerging markets provide for longer-term growth.
The results of the annual survey of 128 global fund managers by Towers Watson, published last week, were complemented by the latest asset allocation views of Mercer Investment Consulting. The Mercer update on its global market outlook, also published last week, concurs with the Towers Watson manager survey.
However, the Towers Watson survey revealed a lot of manager concerns about government intervention. Other concerns were inflation, global economic imbalances and financial instability.
Tim Unger, head of investment strategy at Towers Watson in Australia, said: “It is not surprising that managers have expressed such unease at developed market governmental intervention – including monetary, fiscal, legislative and regulatory measures – given the impact developments such as QE tapering, US fiscal spending going into sequestration and the Volker Rule have had on global markets. The knock-on effects from some of these, particularly QE tapering, on some fragile emerging markets and the Volker Rule’s impact on certain over-the-counter markets, such as the corporate bond market, have been significant.”
(The Volker Rule, part of the Dodd Frank Act, separates investment banking, private equity and proprietary trading sections of financial institutions from their consumer lending arms.)
The survey showed 44 per cent of managers believed their institutional clients would become more aggressive over the next year, compared with 34 per cent last year. Unger said this caught the consultants’ attention because Towers Watson rated developed market equities ‘neutral’, as of February 2014, compared to a rating of ‘moderately attractive’ a year ago, reflecting the change in the firm’s view of valuation levels over the past year.
The surveyed managers expect equity markets in 2014 to deliver returns of 6.9 per cent in the US, 7.0 per cent in the UK, 8.1 per cent in the Eurozone, 6.4 per cent in Australia, 7.3 per cent in Japan and 8.4 per cent in China.
Most managers in the survey still hold overall bullish views for the next five years on emerging market equities (76 per cent versus 83 per cent in 2013), public equities (steady at 78 per cent) and private equity (59 per cent versus 53 per cent). For the same time horizon, the majority remains overall bearish on nominal government bonds (81 per cent versus 80 per cent in 2013), investment-grade bonds (58 per cent versus 47 per cent), high-yield bonds (42 per cent versus 39 per cent) and inflation-indexed government bonds (42 per cent versus 47 per cent).
Across at Mercer, David Stuart, head of dynamic asset allocation in Australia and chief investment strategist for APAC, said equities should offer reasonable returns for 2014. However, Mercer prefers international equities to domestic.
“Globally, developed nations are in the early stage of economic recovery,” he said, “which is normally a good time to invest in equities.” He also believes the Australian dollar has further to fall and investing offshore is a hedge against the falling dollar.
Bonds were not looking “terribly attractive” in Mercer’s view, he said, but were showing slight signs of improvement.