Fund managers' return expectations for Australian and US equity markets are at their lowest since 2008, according to Towers Watson.
Although fund managers have turned more optimistic in 2013 — with expectations increasing by 2 per cent in the UK (7 per cent), 1 per cent in Japan (6 per cent) and 2.2 per cent in China (10 per cent) — they expected the US (7 per cent) and Australia (6 per cent) to return 1 per cent less than in 2012.
Volatility expectations were in the 15-20 per cent range for major economies, and although lower than previous years still exceeded long-term averages, Towers Watson said.
Inflation was viewed as a moderate near-term risk, with some very concerned about long-term inflation in the US and Europe.
Most managers held bullish views on emerging market equities for the next five years (83 per cent compared to 75 per cent in 2012), public equities (78 per cent compared to 72 per cent), and real estate (57 per cent compared to 48 per cent).
The majority remained bearish on nominal government bonds (80 per cent compared to 77 per cent in 2012), money markets (47 per cent compared to 43 per cent), investment-grade bonds (47 per cent compared to 29 per cent) and inflation-indexed government bonds (which remained at 47 per cent).
Managers' GDP growth expectations for 2013 continued a downward trend and ranged from just above 0 per cent in the Eurozone, to 7.5 per cent in China, 2.5 per cent in Australia, 2 per cent in the US, 1 per cent in the UK and 0.9 per cent in Japan.
Managers 10-year growth forecasts were slightly above their one-year forecasts but below historic trends, with the exception of China.
Managers said they expected expansionary monetary policies to hold in 2013, with exceptionally low interest rates in some Western economies which would slowly tighten.
They predicted the continuation of a downward movement of government bond yields to historic lows, reflecting persistent economic weakness and continued central bank asset purchases.
