Willis Towers Watson (WTW) remains downbeat about the prospects for most asset classes over the next three years with the global consultant taking overweight positions in only US inflation-linked bonds and first-world cash.
According to the WTW ‘Global Markets Monthly’ March 2016 report, the firm has rated most assets – excluding 10-15 year US TIPS and developed world cash – as either ‘neutral’ or ‘moderately underweight’.
In its latest monthly report WTW says while it expects “mediocre” global economic growth over the next three years, the risks “are skewed to the downside”.
“While our specific outlook varies by region, in general, we think if downside risks do occur, they are likely to occur at some time during the next three years,” the WTW report says.
“This still leaves us expecting low returns on average because of the combination of low expected cash yields and average at best risk premia. We also emphasise that the prospect for low average returns hides the risk of significant drawdowns at some stage.”
Consequently, the WTW report says the 2016 New Year dip in “risky asset markets” did not represent a buying opportunity for investors looking at medium-term returns.
“Nor do we now, following a short term market rebound,” WTW says. “We believe prospective cyclical returns on offer from risky assets do not fully compensate investors for the cyclical risks.”
By contrast, despite the historically low bond yields on offer, WTW says the asset class could still hold value for investors.
“To that end, we continue to think there is still time to reduce risk or diversify concentrated macro exposures over a medium-term horizon,” the report says.
WTW, which formed last year following the merger of asset consultant Towers Watson and insurance broker Willis, wields a significant influence on institutional investors globally, including via its NZ ‘alliance partner’, Melville Jessup Weaver (MJW).
Meanwhile, the latest MJW quarterly investment report shows mixed results for fixed income investors over the December 2015 quarter.
“It was a poor quarter for local bonds with the return on NZ government stock down 0.4% while the return on the Corporate A-Grade Index was down 0.1%,” the MJW survey says.
“In contrast to the results over the last year, global bonds had a better quarter with a return of 0.8%. On a total year basis we saw similar returns with NZ bonds up 5.4% and global bonds achieving a modest 4.5% return.”
NZ equities were the best-performing asset class over the year, the MJW says, with the NZX50 returning 15.1 per cent for the annual period compared to just 2.1 per cent for the MSCI World Index (in local currency terms).
“Of course an NZ investor with exposure to the fall in the NZ [dollar] would have seen a higher return [from the MSCI World over 2015] – a solid 13.2%,” the MJW survey says.