Global equity returns for 2006 will be in single digits for major global equity indices, trailing last year's double-digit returns for most major markets, with emerging markets set to suffer a particularly sharp decline in performance, according to a new survey of investment managers.
The investment managers from 157 firms worldwide managing a total of US$20 trillion in assets who took part in Mercer Investment Consulting's annual Fearless Forecast survey believed that global equity markets will achieve a median 7.6% return in 2006.
This compares to a 9.5% return for the MSCI World Index in 2005 and annualised historical returns for the past three years of 19.3%.
Nonetheless, investment managers in all regions surveyed expect more volatility in the equity markets in 2006 compared to 2005, particularly outside the United States.
US equity performance is expected to improve in 2006, but only to move more closely in line with the performance of developed markets of Europe, Australasia, and the Far East. Survey respondents managing global assets expect the MSCI USA Index to return 7.5% in 2006, an improvement from the 5.1% return in 2005.
Meanwhile, the respondents forecast a median return of 9.0% in the MSCI Emerging Markets Index for the year ahead - sharply lower than the 34% return achieved by the Index for 2005.
Bond market yields are expected to rise and to deliver a median 4.0% total rate of return for the broad global bond index.
The majority of investment managers in the survey envisaged that both investment grade and non-investment grade spreads will widen in 2006. The best-performing bond markets in 2006 are expected to be in Australia, the United States, the United Kingdom, and New Zealand.
The majority of the investment managers surveyed also predicted that pension funds will increase allocations to alternative investments in 2006, albeit by a modest 5% or less. However, the shift is expected to be greater in the United States, where nearly 60% of investment managers expect allocations to alternative investments will increase by 5% to 15%, or more.
"Although the increase in allocation to alternative investments is anticipated to be limited, this space is rich with a diverse set of opportunities," observed Divyesh Hindocha, worldwide partner and global director of consulting at Mercer.
Alternative classes expected to see the largest increased allocations are: private equities globally; hedge funds of funds in every region excluding Canada; single manager hedge funds in the US and Australia; real estate in Singapore and the UK; and infrastructure and currency overlays in Canada.
"At a time when many plan sponsors around the world are challenged by contribution requirements and new accounting standards, there is exceptional pressure to reassess and, where necessary, reposition investment strategies," noted Rich Nuzum, worldwide partner and Americas business leader for Mercer.
"The survey results are consistent with a view that plan sponsors will continue to react to these pressures in part by seeking increased diversification as well as return enhancement, including by continuing to increase their exposure to alternative asset classes," he added.
Evaluating the prospects for the global economy in the year ahead, the investment managers' median projected growth rate for global GDP was 3.1%, which is in the middle of the 2% to 5% historical growth in global GDP.
Regionally, investment managers expect the highest GDP growth in Singapore (5.0% at the median), followed by the US (3.5%), Australia (3.3%), and Canada (3.0%). Slower growth is expected in the UK (2.1%) and Europe (1.9%).
The 2006 rate of inflation in most countries is expected by survey respondents to be at about the same or lower levels than were experienced in the last twelve months. The highest predicted inflation rates are in the United States and Australia, both at 3%, while the lowest predicted inflation is in Singapore, at 1.6%.
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