UK - Fund managers are warning schemes to brace themselves for lower equity returns next year.
Global equities – as measured by the MSCI World Index – have recovered after three years of falling markets and returning 15.7% since the start of 2003.
However, fund managers believe that equity returns will fall next year to between 5%-10% and say that investors should prepare themselves accordingly.
Barclays Global Investors chief economist Haydn Davies explained that apart from fears of increased terrorist activity, the problem is that while the global economy is recovering, this has already been factored into equity prices.
This means improving economic fundamentals will not provide a boost to equity returns.
Davies said: “Equities should make modest progress with expected returns of 5%-10%, which we really should get used to.
“The simple fact is there’s a lot of spare capacity in the economy, so the danger of weak economic growth is not completely over yet and policy makers will have to tread very carefully not to burst the recovery before it is bedded down. After the last few years investors should be grateful for another positive year.”
Insight Investment head of asset allocation Philip Barleggs agreed.
“Despite continued evidence of strong economic growth, we believe that equities in general now look over-stretched. In most regions they are at or approaching extremes against their medium-term averages and appear to be running out of momentum.”
But State Street Global Advisors chief investment strategist, active equity, Ned Riley disagreed.
He said that in contrast to the “devil may care” attitude of the 1990s, fund managers now were not happy unless they had compiled a list of obstacles to recovery.
“In simple English, they are worrying about things to worry about. Some think that investing cannot take place if their list of worries seems insurmountable. The time to worry is when there are no worries, and the time to be optimistic or opportunistic is when people are able and willing to articulate their concerns,” he said.
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