2012 global survey of investment and economic expectations - towers watson

2012 Global Survey of Investment and Economic ExpectationsExpert views on capital markets, economy, investment and governance

March 2012

© 2012 Towers Watson. All rights reserved.

Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Table of Contents

About the Survey I. Profiles of Survey Respondents II. Capital Market Expectations III. Macroeconomic Forecasts IV. Investment and Governance

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Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com

3© 2012 Towers Watson. All rights reserved.

About the Survey


About the Global Survey

Objectives: Seeking investment managers’ views on prospects for capital markets and

global economies Identifying governance issues and investment strategies of leading

institutional investors and investment managers Survey fielded from Dec. 1, 2011, through Jan. 6, 2012 Opinions of investment managers, economists, strategists and market

analysts 114 responses in this global survey For the U.S. and Canada only, 43 responses were added from the Canadian

Survey of Economic Expectations (fielded in Nov. 2011) on a few indicators such as real GDP growth, inflation, government bond yields, equity return, etc.


4



I. Profiles of Survey Respondents


Respondents have a worldwide business presence, and the overwhelming majority of them have 10+ years of experience in the investment industry

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Global23%

North America54%

Europe7%

Asia Pacific8%

Other8%

Geographic Focus

N = 158

1 – 5 years1%

Years of Experience inthe Investment Industry

N = 110

6 – 10 years6%

11 – 15 years24%

16 – 20 years23%

21 – 25 years18%

26 – 30 years13%

30+ years15%


Assets under management

Institutional — Average $74.1 billion, total $7.8 trillion Retail — Average $29.9 billion, total $1.9 trillion


7

Retail

N = 64

$0 – $100m19%

$100m – $1b31%$1b – $10b

28%

$10b – $20b3%

$20b – $50b3%

$50b+16%

Institutional

N = 105

$0 – $100m9%

$1b – $10b38%

$10b – $20b7%

$20b – $50b10%

$50b+16%

$100m – $1b20%



II. Capital Market Expectations


Managers expect modest equity returns (particularly depressed for the U.K. and Eurozone) and significant downside risks in 2012

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15.0 14.0 14.6 15.019.1

15.3 16.6

8.05.0 6.0 7.0 7.0 5.0

7.87.44.2 3.6

6.3 7.65.1 7.0

-4.7-9.0 -10.0

-1.8 -3.5

-10.0 -10.0

U.S. U.K. Euro Zone Canada Australia Japan China

2012: Equity Return (%)

25.330.0 30.6

25.0 25.0 25.0

36.3

18.0 17.523.0

15.020.0

16.0

25.0

17.5 18.922.4

16.6 17.6 17.522.4

8.0 10.0 10.0 10.0 10.0 10.0 10.0


2012: Equity Return (std. dev. %)

95%tile Median Mean (in square) 5%tile


A more cautious view has developed in recent years

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Total return on S&P 500 Index 1962 - 2011: average 9.2%, std. dev. 17.7%Canada was not listed in prior surveys. The 2009 and 2010 surveys listed “Asia excl. Japan” instead of “China.”

Equity Return for 2012 (%, Median Projection)

8.8

5.0 5.5

8.0

5.0

10.09.0

8.59.0 9.0 9.0

14.5

10.0 10.0

7.0

10.0

6.0

10.5

8.0

5.06.0

7.0 7.0

5.0

7.8

U.S. U.K. Eurozone Canada Australia Japan China

2009 survey 2010 survey 2011 survey 2012 survey


Managers anticipate muted equity returns in the long term

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11.010.0

11.110.0

13.3

10.2

15.0

7.0 6.6 6.5 7.08.0

5.0

8.07.56.4 6.4 7.1

8.1

5.4

9.1

5.02.8 1.9

4.7 5.0

1.6

5.0


Next 10 Years: Equity Return (%)

25.028.6 29.4

22.4 21.025.0

30.4

15.0 16.020.0

15.0 16.5 16.4

24.0

15.7 17.4 19.715.7 15.8 17.3

21.7

6.910.0 10.5

6.9 5.510.0

7.5


Next 10 Years: Equity Return (std. dev. %)



Government security yields are expected to remain around historical lows in 2012…

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3.7 4.3

6.4

4.1

6.0

2.0

10.0

2.5 2.5 2.5 2.54.0

1.2

4.02.5 2.7 3.2 2.9

4.4

1.4

5.0

1.8 2.0 2.0 2.03.1

1.0

3.0


2012: 10-year Government Yield Rate (%)


1.0 1.5 1.7 2.0

4.5

0.4

6.0

0.2 0.5 0.5 1.0

3.8

0.1

3.0

0.3 0.5 0.7 1.1

3.2

0.1

3.4

0.0 0.0 0.0 0.51.0

0.0

1.8


2012: 3-month Government Yield Rate (%)


…and rise over years, modestly and gradually

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3.34.2 4.4 5.0 5.7

2.4

6.0

2.03.0 2.8 3.0

4.0

1.0

4.0

2.1 2.7 2.6 2.93.7

0.9

4.1

0.51.4 1.2 1.0 1.0

0.0

2.4


Next 10 Years: 3-month Government Yield Rate (%)

6.8 7.0 6.8 6.47.4

3.9

10.0

4.1 4.4 4.0 4.55.5

2.0

5.04.3 4.6 4.4 4.55.6

2.2

5.7

2.8 3.0 2.9 2.84.0

1.0

3.5


Next 10 Years: 10-year Government Yield Rate (%)



Downward movement in forecasts of government yields reflect actual realizations in the prior year, as most economies remain relatively weak

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U.S. 10-year Treasury yield was 6.8% on average over 1962 - 2011 and 2% at the end of 2011.Canada was not listed in prior surveys. The 2009 and 2010 surveys listed “Asia excl. Japan” instead of “China.”

3.0 3.0 3.0

4.0

1.1

4.03.8 4.03.5

5.5

1.6

5.0

3.8 4.03.5

6.0

1.4

4.8

2.5 2.5 2.5 2.5

4.0

1.2

4.0



10-year Government Bond Yield (%, Median Projection)


Sovereign debt default and government interventions are top issues for investment analysis

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13%

33%

46%

7%

36%

7%11%

28% 29%

19%

2% 4%8%

4%0%

48%

3%

a b c d e f g h i j k l m n o p q

a. Globalizationb. Global economic imbalancec. Sovereign debt defaultd. Trade protectionisme. Financial stabilityf. Oil prices

g. Currency (de)appreciationh. Inflationi. Rise of emerging economiesj. Demographic changesk. Terrorisml. Environmental change

m. Scarcity of natural resourcesn. Corporate governanceo. Management of human resourcesp. Government intervention,

including monetary, fiscal and legislative/regulatory measures

q. Other

Most Relevant Issues for Investment Analysis Over the Next 5 Years


There is renewed concern about financial stability, attributable to the Eurozone debt crisis and decreased worries about inflation, despite global quantitative easing

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44%

n/a

69%

45%

n/a

43%

n/a

32%

51%48%

42%45%

23%

39%

49%

33%

46%

36%

28%

48%

Global economicimbalance

Sovereign debt default Financial stability Inflation Governmentintervention


Top Issues for Investment Analysis


Managers are bullish about emerging markets, public equities, and high-yield bonds over the next five years…

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18% 13% 14% 14%6% 5% 4% 5% 5% 2%

57%59% 49% 45%

50% 50%44%

33% 32%

20%10% 5%

Modestly bullishStrongly bullish


…and bearish about government bonds and money market, presumably driven by the Eurozone crisis

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2% 2% 2% 3% 2% 4% 3% 1%15%

7%

35%

5% 5% 8% 12% 14% 21% 19% 26% 28%

28% 40%

42%

Modestly bearish

Strongly bearish



III. Macroeconomic Forecasts


Reference: Actual economic statistics around the survey time

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Real GDP growth (%)* 1.5 0.5 1.4 2.4 2.1 -0.7 8.9

Unemployment rate (%) 8.5 8.4 10.3 7.5 5.2 4.5 4.1

CPI inflation (%) 3.0 4.2 2.7 2.3 3.5 -0.5 4.1

Central bank interest rate (%) 0.3 0.5 1.0 1.0 4.3 0.0 6.6

3-month government yield (%) 0.0 0.2 0.0 0.8 4.0 0.1 4.0

10-year government bond yield (%) 1.9 2.0 2.7 2.0 3.8 1.0 3.4

*Latest quarter available in 2011 over the same quarter in 2010


Looking ahead, managers expect growth to be fast in China and Australia, moderate in the U.S. and Canada, and more sluggish in the Eurozone, the U.K. and Japan

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4.0 3.3 3.04.1 4.1

2.6

9.0

2.5 2.0 1.52.5 3.0

1.5

7.0

2.6 2.1 1.72.8 3.2

1.5

6.8

1.5 1.0 1.0 1.8 2.30.5

4.9


Next 10 Years: Real GDP Growth Rate (%)


3.0 2.81.8

3.2 4.03.0

9.0

2.01.0

0.02.1

3.01.5

8.0

2.00.9

-0.2

2.2 2.81.3

7.6

0.5-0.9

-2.0

1.0 0.7 0.0

5.0


2012: Real GDP Growth Rate (%)


Managers are adjusting down their expectations of real GDP growth across economies

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Canada was not listed in prior surveys. The 2009 and 2010 surveys listed “Asia excl. Japan” instead of “China.”

-1.0 -1.0 -1.0

0.0

-0.5

2.52.51.7 1.5

3.0

1.2

7.0

3.0

2.0 1.8

3.2

1.5

8.9

2.0

1.0

0.0

2.1

3.0

1.5

8.0



One-Year Ahead Real GDP Growth Rate (%, Median Projection)


Unemployment is expected to remain a tough challenge, especially for the Eurozone

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9.911.4

14.7

8.0 8.0 7.5 8.48.5 8.510.6

7.35.4 4.5 4.3

8.5 8.610.6

7.25.7

4.7 4.87.7

5.77.3

6.04.9

2.3 3.0


2012: Unemployment Rate (%)

9.0 10.012.0

8.0 7.0 6.08.4

7.0 7.09.0

6.55.0 4.9 4.5

6.9 7.29.0

6.45.3 4.8 4.95.0 5.1 6.0 5.0

4.02.3

3.5


Next 10 Years: Unemployment Rate (%)



Expansionary monetary policies are expected to hold in 2012, with exceptionally low interest rates, and gradually tighten over the years ahead

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1.0 1.0 1.22.0

4.9

0.1

6.5

0.3 0.5 0.8 1.0

4.0

0.1

5.0

0.3 0.5 0.8 1.2

3.7

0.1

4.7

0.0 0.0 0.01.0

1.6

0.0

3.0


2012: Central Bank Interest Rate (%)

4.9 4.6 4.45.0

6.0

1.9

7.1

2.5 3.0 2.5 3.0

4.9

0.5

5.0

2.6 2.9 2.73.3

4.7

0.7

5.3

0.5 1.0 1.11.8

3.1

0.0

2.9


Next 10 Years: Central Bank Interest Rate (%)



Inflation is viewed as a moderate risk, but with a wide range of possible outcomes, tending to the upside for years to come

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3.6

5.03.7 3.5 4.0

2.5

7.5

2.03.0

2.0 2.03.0

0.0

4.0

2.33.0

2.0 2.33.2

0.3

4.5

1.01.7

1.01.5

2.3

-0.8

2.9


2012: CPI Inflation Rate (%)

5.05.6

4.14.7 4.2

2.7

6.7

2.5 2.92.0 2.5 3.0

0.8

4.5

2.9 3.02.3 2.7 3.1

0.8

4.6

1.9 1.5 1.02.0 2.2

0.0

3.0


Next 10 Years: CPI Inflation Rate (%)



Managers expect major currencies to maintain stable values, despite the Eurozone crisis, and Chinese RMB to appreciate, gradually

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1.6

1.4

1.1 1.10.85

0.65

1.6

1.3

1.0 1.00.80

0.62

1.5

1.3

1.0 1.0

0.790.61

1.5

1.1

1.0 0.90.72

0.54

GBP/US$ Euro/US$ US$/CAD AUD/US$ US$/JPY/100 US$/RMB/10

2012: Exchange Rate

1.8

1.5

1.1 1.2

0.93

0.62

1.6

1.2

1.0 1.00.85

0.55

1.6

1.3

1.0 1.00.84

0.54

1.4

1.00.9 0.8

0.68

0.44GBP/US$ Euro/US$ US$/CAD AUD/US$ US$/JPY/100 US$/RMB/10

Next 10 Years: Exchange Rate



Oil prices are expected to rise at a fairly mild pace

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120.0

150.0

100.0

120.0

98.2

119.6

80.5 80.0

2012 Next 10 years

WTI Crude Oil Price (US$/barrel)


Year-end 2011 actual price: $98.5/barrel.



IV. Investment and Governance


In 2012, the U.S. is viewed as the region of most rewarding investment opportunities

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44%

21%

13%

8%7%

5%2%

0%

U.S. China Other Australia Euro-zone Canada Japan U.K.


Institutional investors are expected to revert to more conservative strategies, reflective of poor prospects in many asset classes

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22%

43%

20%

11%

3%2%

49%

23%26%

0%2%

24% 22%

50%

1%5%

40%

29%

23%

3%

Substantially moreconservative

Modestly moreconservative

Roughly no change Modestly moreaggressive

Substantially moreaggressive


Investment Strategy of Institutional Clients


There is little doubt among managers about economic and political difficulties ahead

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37%41% 43%

69%

24%

50% 48%43%

26%

55%

13% 11%15%

5%

21%

a b c d e

Yes, this will happenYes, but only to a limited extentNo, this will not happen.

What Will Happen Over the Next 5 Years?

a. As a result of recent events, risk appetites of investors, particularly of individuals, will diminishb. There will be further periods of financial instability and crisis, but investors will continue to shift their investment focus

to the Asia Pacific regionc. The industry will face increased regulatory burden, increasing its costs with mixed but net positive results regarding

the effectiveness of this regulation d. The economic and political conditions will be very difficult, with lower-than-average growth trend in many

economiese. Savings rates will increase, and consumer consumption will fall, creating impediments to economic growth


Towers Watson Investment’s views — Base case


“Bumpy ride” as a levered developed world economy delevers over time

Anemic and volatile developed world economic growth and market performance over the next 5+ years, with low to moderate inflation

The housing market is key for a U.S. recovery

Negative equity of many U.S. households is a headwind*

We see the risks skewed toward deflation rather than inflation

U.S. debt to GDP by issuing sector: Rise in sovereign debt, but fall in overall debt levels

Sources: Thomson, Towers Watson

0%

50%

100%

150%

200%

250%

300%

350%

400%

70 75 80 85 90 95 00 05 10

ForeignFinancialNon-financial BusinessHouseholdsState and local GovernmentFederal Government

80100120140160180200220240260

2000 2002 2004 2006 2008 2010

Inde

xed

at Q

1 20

00 =

100

US S&P/Case-Shiller National Home PriceIndexUS mortgage debt

Source: U.S. Bureau of Economic Analysis, Standard & Poor’s

U.S. housing markets — House prices versus mortgage debt

*See Global Markets Overview, Towers Watson Investment, December 2011. 32


Global Markets Overview

Our Global Investment Committee’s views on the economyand the markets are published monthly.

Asset Return Assumptions

Our capital market assumptions are updated quarterly and are available to clients.

Towers Watson Investment’s views —For more information


33


Contact details

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Carl Hess 212 309 3800 [email protected]

Matthew Stroud 212 309 3835 [email protected]


Disclaimer

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The information included in this presentation is general information only and should not be relied upon without further review by the appropriate professional advisors. Towers Watson is not a law firm or accounting firm, and we are not providing legal, accounting or tax services or advice. Additionally, material developments may occur subsequent to this presentation rendering it incomplete and inaccurate. Towers Watson assumes no obligation to advise you of any such developments or to update the presentation to reflect such developments.

This document may not be reproduced or distributed to any other party, whether in whole or in part, without Towers Watson’s prior written permission, except as may be required by law.

2012 global survey of investment and economic expectations - towers watson

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