GLOBAL - Fund managers responsible for nearly $8trn (€5.6trn) in institutional assets are predicting 2012 will see lower equity returns than 2011 across all major markets, according to a survey by Towers Watson.

Citing a combination of the Western world's rising debt burden, as well as growth prospects being revised downwards across most markets, the consultancy said the 114 respondents to its survey predicted lower returns for equity investments - with predictions for the UK market falling by half against 2011's expectation.

Speaking about the results, Towers Watson global investment committee chairman Robert Brown said the economic recovery remained "as elusive and fragile as ever", with fund managers altering their outlook.

"Their optimism from last year, and the year before, is replaced by a less sanguine view about investors' propensity to take risk in 2012, with managers' significantly reducing the returns they expect from risky assets," he said.

However, despite respondents' fears that Greece would be the country most likely to default, with Portugal ranking second, they did not expect the risk of contagion to spread beyond the two countries.

Brown noted that structural reforms and austerity measures presented a "tremendous challenge", delaying the chances for economic recovery worldwide and raising other issues for managers.

"Politics have become enmeshed in the financial world since the global economic crisis began, and managers have justifiably identified this as the top issue for them," he said.

Equity volatility was expected to be between 15% and 25% in most markets, with the returns predicted for the euro-zone and Japan the most stable year on year.

Compared with 2011, equities within the European single currency were only expected to return 1 percentage point less, down from 7%, while Japanese returns saw a comparative drop to 5%.

The US was viewed as the best equity market to invest in, with predicted returns down 2 percentage points to 8%, while Chinese prospects declined from 10.5% to 7.8%.

Australian stocks were expected to see the third-highest returns - despite also witnessing the sharpest fall in predicted returns, from 10% in 2011 to just 7% this year.

"While it would be a stretch to say this bullishness about risk assets is misplaced optimism, we would still caution investors - particularly pension funds - against taking on more risk, even in light of ongoing market rallies," Brown said.

"The move into positive territory for many markets this year is helpful, but largely reflects central bank liquidity and may not prove sufficiently sustainable to justify a strategic move back into risk assets or indicate a cyclical recovery."

Topics