Mercer: US Equities to Hit 7.3% in 2005

January 10, 2005 ( - US equity markets will continue pushing upward in 2005 with targeted returns of 7.3%, while corporate profits, interest rates and the state of the economy affect the US capital markets.

That was a key conclusion of the 2005 US Fearless Forecast, an annual survey by Mercer Investment Consulting (Mercer IC) of 49 US investment managers, a Mercer IC news release reported.

According to the survey, the 2005 outlook for the US bond market remains listless with potential further interest-rate hikes keeping expectations in check. Managers expect inflation to decline significantly from an estimated 3.8% at the end of 2004 to approximately 2.6% in 2005 with the unemployment rate forecast to fall slightly to 5.3%.

Continued movement from the Federal Reserve was on the surveyed managers’ radar screens for the coming year. Mercer said respondents expected the Fed push up rates by approximately 100 basis points by year end. “This indicates their belief that the Fed will take measured steps to contain inflation yet still promote economic growth,” MercerIC said in the announcement. Managers expect GDP growth to drop slightly from a year-end estimate of 4.4% to 3.4% for the upcoming year.

Managers expect large- and small-cap stocks to have similar returns for 2005, the Mercer IC survey found. Within style mandates, growth stocks are expected to return low to mid 8% returns while value stocks have return expectations only in the upper 6% range.

Meanwhile, respondents predicted that non-US stocks will outperform domestic equity returns for the coming year. Similar to the last year’s prognostications, emerging markets are forecast to provide the highest asset class return. Not surprisingly, more than seven in 10 of the managers see further rises in alternative investment allocations -, primarily through hedge funds – although managers also equally cited commodities and private equity.

Around the World

Global investment managers expect the global economy to slow somewhat in 2005, according to Mercer ICs global forecast. The participating investment managers expect on average that global real GDP will grow at 3.1%, robust but below the estimated 2004 year-end growth in real GDP of 4.8%.

On global equity markets for 2005, managers forecast an average return of 7.7% for the MSCI World Index. Emerging markets predictions for 2005 were down from last year’s, with managers predicting an average return for the MSCI Emerging Markets Index of 10.4%.

For the second year in a row, global managers predict that Japan will be the most attractive equity market. The United Kingdom showed second in the managers’ predictions, with third and fourth rankings being closely contested among the managers, showing no strong consensus. The United States and Germany are predicted to be the least attractive equity markets in 2005.

The survey is at . More information about MercerIC is at . A free registration is required.