Despite the global economic slowdown, historic market losses and unprecedented volatility that defined 2008, investment managers are optimistic about the performance of capital markets in the year ahead, according to a survey released Thursday.

Equities are expected to stage a modest recovery and rank as the most attractive asset class, according to Mercer’s 2009 Fearless Forecast survey of Canadian and global institutional investment fund managers.

Major equity markets around the world closed 2008 with astonishing losses in the range of -30% to -40% on a local currency basis. The majority of the managers surveyed are predicting markets will bottom-out and produce overall solid performance in 2009. On average, the managers expect Canadian and foreign equity markets will earn near 10% over the course of the year. The expectation of positive returns is tempered by pessimism regarding a full market rebound. Almost all managers (just under 90%) believe that it will take at least three years for the S&P/TSX to reach its former high of 15,000.

Investment managers forecast Canadian bonds to produce only modest returns near 4% in 2009. Corporates are forecast to be the top performing segment of the bond market, with a median expected return of 6%.

The price of oil fell from its mid-year peak of US$147 per barrel to close the year at US$44, and the managers forecast a rebound to US$60 by the end of 2009. The Canadian dollar is forecast to end the year at US85¢, near current levels. Even the most optimistic forecasts have the Canadian dollar below par with the U.S. dollar.

“2008 marked a year of extreme volatility, affecting essentially all markets around the world ” says Jaqui Parchment, director of consulting for Mercer’s investment consulting business in Canada.
“Sponsors must work within the plan’s risk tolerance framework when making investment strategy decisions. At the same time, they should build in the flexibility to grab the right investment opportunities going forward.”

The performance of the global economy and capital markets, access to credit for corporations, oil prices as well as global demand for natural resources are expected to be the top issues impacting Canadian capital markets in 2009.

Other key investment manager forecasts for 2009 include:

> a modest decrease of 0.25% in the Bank of Canada overnight rate from 1.50% to 1.25% by the end of 2009;

> an expected increase in the U.S. federal funds rate from the current range of 0.00-0.25% to 0.50% by the end of 2009;

> annual domestic inflation is expected to decline to 1.4%;

> the Canadian economy is expected to register zero growth, while the global economy is forecast to grow at a slow pace of 1.50% over the year;

> the Canadian unemployment rate is expected to increase to 7.7%.

The majority of managers surveyed expect the level of non-traditional investment mandates to decrease, while the allocation to duration-matched assets is expected to increase over the course of 2009.

The survey was conducted in December 2008, and includes predictions and views of the Canadian and global markets from 48 leading Canadian and global institutional investment managers. Together, these firms manage over $9.7 trillion for Canadian pension funds and other investors globally.