Investment managers are expecting the new decade to kick off with renewed economic growth and solid equity performance, but bond returns will be weak, according to a recent survey by consulting firm Mercer.

Mercer’s 2010 Fearless Forecast survey of 54 Canadian and global institutional investment fund managers, conducted in December, reveals that managers expect the rally in equities to continue in 2010.

“Managers are optimistic on the markets in 2010,” said Wendy Mizuno, national partner of investment consulting at Mercer, who presented the survey results in Toronto on Tuesday.

Managers predict double-digit returns for Canadian equities in 2010, with a median return of 10% for the S&P/TSX composite index. Slightly lower returns of 8% to 9% are expected in the U.S. and other foreign developed countries. Emerging markets are forecasted to be the top performing asset class, with a median expected return of 13%.

In terms of sectors, energy, information technology and industrials are expected to be the best performers in 2010, while utilities and telecommunications are expected to lag the market.

Despite their high expectations for stock markets 2010, managers do not see equities quickly rebounding to their pre-recession levels. They expect it to take another three to five years for the Toronto Stock Exchange to return to its previous high of over 15,000, Mizuno said.

Investment managers are far less enthusiastic about bonds in 2010. Low current yields combined with expectations of rising interest rates are predicted to make Canadian bonds one of the poorest performing asset classes in 2010, according to the Mercer survey.

The managers surveyed expect a median return of only 2.75% for the DEX Universe index. The corporate fixed income sector appears relatively more attractive, with managers forecasting a slightly higher median return of 4.1% for the DEX Corporate index.

In terms of 2010 economic growth, managers expect the Canadian and global economies to expand at a rate of 2.6% and 3.1%, respectively.

The Canadian dollar is forecasted to trade near parity with the U.S. dollar at the end of 2010, buoyed by rising commodity price trends – especially the price of oil – and concerns about future inflation in the U.S. Managers predict the price of crude oil will reach US$85 per barrel at year end.

Pension fund managers likely to reduce risk

In terms of the management of pension assets in 2010, managers expect allocations to non-traditional investment mandates to increase as plan sponsors seek ways to improve diversification. In addition, following a year in which many managers took advantage of tactical investment opportunities, Mercer expects plan sponsors to focus more on strategic asset allocation and risk management in 2010.

Mizuno said many plan sponsors learned important lessons from the crisis, and are likely to undertake de-risking strategies this year to better prepare for future downturns.

“While reluctant to de-risk at the bottom of the equity market in late 2008 and early 2009, we expect that some plan sponsors will take a serious look at reducing their exposure to growth assets after the recent market surge,” she said.

As part of their de-risking, Mizuno said pension plans must also more closely monitor funding levels, and learn to more rapidly react to market changes by making quick rebalancing decisions.

“We anticipate that an increasing number of sponsors will proactively develop a plan to quickly respond to these changes,” said Mizuno.

IE