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‘Fearless Forecast’ 2005 says Japan and the UK are the markets to watch Back  
The Irish equity market has significantly outperformed its global peers over the past 12 months, writes Tom Geraghty, but a survey of global investment managers has predicted that for a second year in a row, Japan, along with the United Kingdom will be the most attractive equity markets this year.
EEEEach year, Mercer Investment Consulting conducts a survey of leading investment managers to gauge their expectations for the year ahead. This year’s Fearless Forecast represents the thoughts and views of 55 pan-European and 33 global investment managers on the economy and capital markets. The following are some observations from this survey, including where managers see opportunities throughout 2005.

Highlights of 2005 global results
In 2005, global investment managers on average expect global real GDP to grow at 3.1 per cent. Their predicted growth is robust, but below the estimated peak growth in real GDP of 4.8 per cent experienced in 2004, and suggests a slowing of the global economy.

Accordingly, world equity markets are predicted to post reasonably strong, but relatively lower returns in 2005. Global managers on average expect the MSCI World Index (in US dollars) to return 7.7 per cent in 2005, down from 2004’s 14.7 per cent. The MSCI EAFE Index is expected to return an average of 9.2 per cent in 2005, down from 2004’s 20.2 per cent, and the MSCI Emerging Markets Index is forecast to return an average of 10.4 per cent, down from 2004’s 25.6 per cent.

Global managers express divergent opinions on the best and worst performing sectors of the global equity market for the coming year. The most often predicted top performing sectors are health care, telecommunications, consumer staples, and energy. The predicted bottom sectors are financials, consumer discretionary, information technology, and materials. Differences of opinion are most apparent in the energy and materials sectors, where significant numbers of investment managers pick these among both the top and bottom performers.

Global managers believe Japan, for the second year in a row, along with the United Kingdom, will likely be among the most attractive equity markets in 2005, while the United States and Germany are expected to be the least attractive. These predictions are a departure from the experience in 2004, where these four country equity markets posted roughly similar annual returns ranging from six per cent to nine per cent.

Global managers generally don’t predict strong movements away from the current exchange rates between the US dollar, British pound, euro, and Japanese yen in 2005. This is contrary to the view held by some that chronic US budget and trade deficits will cause the dollar to trend downward against other currencies in the long term. Most global managers expect bond spreads to widen in 2005. The most attractive country bond markets are expected to be the UK and Eurozone, with the US and Japan as least attractive.

Global managers most often choose private equities and commodities as the alternative investments most likely to post the highest five-year return through December 2009, while hedge funds were chosen far less often.

Predictions are certainly a tricky game. With so many imponderables driving the ultimate return of asset classes and indeed regions and countries, it is often difficult for managers to delineate true drivers of future performance. What is evident is that Irish investment managers, for both legacy reasons as well as conventional market practice, have traditionally held a high proportion of their assets in Irish equities. My sense is that this will not change very much throughout 2005 and that Irish equities will remain above 15 per cent. I disagree with this level of concentration largely because of the inherent risks it implies, but that’s for another day. However, what can not be disputed is the fact that this strategy has certainly been to their benefit in terms of bottom line performance. As the response to our survey of global managers displays, this strategy does seem at odds to conventional global industry wisdom.

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