Investors are predicting what various asset classes have in store for the next 12 months, following the disappointment in 2010 of a slower than expected recovery and ‘double dip’ concerns.


Equities

Despite the focus away from equities towards diversification of assets, the industry is reasonably upbeat about the possibilities for equities in 2011, even being described as “the place to be in 2011” by James Smith, manager of the Ignis global growth fund. “Earnings growth is good and companies are well placed to increase dividends. Markets, distracted by macro concerns, have, however, ignored these positives – an oversight I expect to be rectified in 2011,” he explained.

This viewpoint is shared by Baring Asset Management head of asset allocation Percival Stanion. He said: “Equity risk premia are at levels where even a modest rise in bond yields would show that equity markets still offer good value. And the Federal Reserve is printing money, the Bank of Japan is printing money, the Bank of England will print if necessary and perhaps even the European Central Bank will print eventually. Such policy seems to be designed to beat the prudence out of investors, dragging them kicking and screaming into higher risk assets.”

Somewhat more cautiously, Ian Lance, equity income portfolio manager at RWC Partners, has suggested an average of 4% pa on average for the next seven years, “which is better than government bonds but without giving much of a risk premium”.

The UK and European markets should be of particular focus for the upcoming year, with Threadneedle predicting gains of around 15% next year in the UK stockmarket.

The reason for optimism in European equities, Luke Stellini, Invesco Perpetual’s European equity product director, explained, “results from a view that while valuations continue to discount extremely high risk premiums, those risks are receding. What we are left with is an asset class where the underlying macro is improving, valuations are extreme, participation is very low and where history, were it to repeat itself, points to a very attractive entry point.”

Barings remained positive about emerging market investment. “The International Monetary Fund expects emerging economies to have grown by 7.1% over the course of 2010, compared to just 2.7% in the developed world. We are mindful of inflationary pressures in China, although the long-term fundamentals remain positive, underpinned by robust performance in the manufacturing and retail sectors,” Stanion explained.

But in contrast, Ignis’ Smith claimed emerging markets, along with the US and Asia (ex Japan) look expensive relative to their growth prospects.


Bonds

Corporate bonds had a strong 2010 and more of the same is expected in 2011, Chris Bowie, manager of the Ignis corporate bond fund said. However, he warned that returns are more likely to be around 5% instead of the 10% the best corporate bond funds returned in 2010.

Stuart Frost, portfolio manager of the RWC cautious absolute rate and currency fund at RWC Partners, has predicted a somewhat more rocky ride as bond volatility is expected to increase in 2011 at the expense of equity volatility.

He explained: “Government bond issuance will come thick and fast in 2011 and this is only going to keep two-way bond volatility excessive. Bond curves are likely to remain steep, but flattening modestly from time to time in 2011, but it is difficult to see any dramatic flattening as we have seen post previous recessions. In many respects the pressure on long end bond yields is a reflection of an increased risk premium relative to the emerging world and we cannot discount a slight tightening at some stage in 2011, however unlikely that seems given the continued accommodative stance of many central banks.”


Property

This sector is expected to be one of contrasts in the upcoming year. Property investors will have to get used to a multi-speed recovery, LaSalle Investment Management warned, as development and leasing will provide the best investment opportunities in Asia Pacific, and edge-of core properties will be attractive in the UK, France and the US.

Keith Sutton, director of European real estate and portfolio manager at Fidelity's European real estate fund, expects international investors to see more core office deals in western Germany, the Netherlands and Belgium at sub 5.5% over the next few months.

However, his focus is on second tier markets in Western Europe, “where we see relatively low market risk and a systematic mispricing of assets. On a macro level, this kind of real estate investment strategy should be generating a healthy income return premium of over 250 bps over European government bonds, with a much higher level of protection against inflation.”


Hedge funds

European privately owned asset manager Unigestion has forecasted periods of sharp volatility in markets, generating significant opportunities for tactical trading and arbitrage strategies in the year ahead. It believes the former are well placed to take advantage of the opportunities created by volatile markets and shifts in expectations concerning the economic environment, while the latter benefits from a wave of corporate refinancing activity spurred on by the low interest rate environment.

This is in contrast to equity hedging strategies, which Unigestion predicted will face a difficult environment, as uncertainties about markets' direction are likely to benefit stock pickers and market neutral managers, with opportunities reducing for credit hedge strategies.


Currency

Global economies have been subject to much concern during 2010, but according to RWC’s Frost, “despite all the negatives coming out of developed economies, it is clear to us that those countries that have independent control over their currencies, and specifically those that have experienced substantial currency devaluations are probably better placed to surprise on the upside of growth.

“In particular we expect to see good stability and some strength in the US Dollar and British Pound, with exports likely to be in rebound despite the persistence of high unemployment numbers.

“In Europe, clearly Germany is at the forefront of activity, with the Benelux countries and indeed much of Northern Europe showing signs of recovery. Clearly southern Europe and Ireland continue to struggle in what has become a two tier Europe all held together by the Euro. Despite the strength of Germany and others, it is an inescapable truth that if the Euro is going to hold, then to accommodate the weaker constituent parts of the Euro, we have to see some Euro weakness in 2011 down to 1.20 and lower. That in itself is not a disaster given that the Euro has traded as low as 0.91.”

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