UK – European institutional investment managers expect European equities to return 10% in 2004, according to a survey by Mercer Investment Consulting.

The survey of 55 managers also found that UK equities were expected to rise by eight percent this year.

The survey found that the global economy and interest rates were cited as the two most important issues for European capital markets this year, followed by currencies and corporate earnings.

Half the managers thought deflation was as big a risk as inflation, which is to remain low.

Hedge funds and private equity were seen as major growth areas for alternative pension fund investment.

The Netherlands and Germany were two of the three most attractive individual country equity markets for 2004 according to global managers, alongside Japan.

Investors were more “optimistic about opportunities for 2004,” said Divyesh Hindocha, the head of Mercer’s operations in continental Europe. But he also added, “investors will have new asset classes to tackle and will need to be vigil ant about corporate governance issues and transaction costs".

The operating environment for fund managers would remain “tough”, although stock markets are predicted to continue their recovery this year, said Andrew Kirton, Mercer’s head of UK investment consulting.

“Low inflation, increased demand for alternative and absolute return assets, a testing regulatory environment and greater emphasis on shareholder activism will present challenges. But 2004 is not without opportunity for the innovative and specialist players."

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