Global Investment Managers See Positive 2006 Equities

Press Release:

Global Investment Managers See Positive 2006 Equities Performance

Press Release
News Article January 2006

   -- Global equity returns for 2006, including those in Asia Pacific,
      will be in single digits for major global equity indices, trailing
      last year's double-digit returns for most major markets

   -- Global bond market yields are expected to rise, with low or
      negative returns for long bonds

NEW YORK, Jan. 9 /Xinhua-PRNewswire/ -- Investment managers expect that performance of equities in 2006 will lag 2005 double-digit returns for major global equity indices, with a particularly sharp decline in the outlook for emerging markets, according to Mercer Investment Consulting's annual Fearless Forecast survey. Investment managers from 157 firms worldwide, which have more than US$20 trillion in assets under management, participated in this year's Fearless Forecast, an established, highly-regarded survey of economic and capital markets expectations for the year ahead.

The investment managers, based in Europe, North America and Asia Pacific, were asked for their global and regional views on the economy and capital markets for 2006. Respondents were asked to make investment forecasts in US dollar terms.

Global equity markets will achieve a median 7.6% return in 2006, the global investment managers in the Mercer survey predicted, which compares to a 9.5% return for the MSCI World Index(SM) in 2005 and annualized historical returns for the past three years of 19.3%.

Global investment managers surveyed expect the MSCI Pacific ex Japan Index(SM) to post a return of 8.8% in US dollars in 2006 compared to a 13.8% return in 2005. "The positive performance delivered by equities markets in 2005 has raised expectations for another sterling run in 2006, although fund managers perceive the ride to come at a slower pace.

It bears reiterating though, that diversification and discipline should remain as the watchwords for investors," says Garry Hawker, Asia ex Japan Business Leader at Mercer Investment Consulting.

Global investment managers surveyed forecast a median return of 8.0% in 2006 for the MSCI EAFE(R) (Europe/Australasia/Far East) Index, which compares with a 13.5% return posted in 2005. However, there was wide variation in the predictions, from 3.0% to 13.2% (at the fifth and 95th percentiles).

Consistent with this wide range, investment managers in all regions surveyed expect more volatility in the equity markets in 2006 compared to 2005, particularly outside the United States.

US equity performance is expected to improve in 2006, but only to move more closely in line with the performance of developed markets of Europe, Australasia and the Far East. Survey respondents managing global markets expect the MSCI USA Index(SM) to return 7.5% in 2006, an improvement from the 5.1% return in 2005.

Turning to developing markets, the global investment managers in the Mercer survey forecast a median return of 9.0% in the MSCI Emerging Markets Index(SM) in the coming year, sharply below the dramatic 34.0% return achieved in 2005.

Bond market yields are expected to rise, according to the global investment managers surveyed, and to deliver a median 4.0% total rate of return for the broad global bond index. The majority of investment managers in the survey expect both investment grade and non-investment grade spreads to widen in 2006. The best performing bond markets in 2006 are expected to be in Australia, the United States, the United Kingdom, and New Zealand.

The picture for pension plans
Public equity has been undervalued and out of favour over the last three years," observed Divyesh Hindocha, worldwide partner and global director of consulting, Mercer Investment Consulting. "Despite the strong performance over this period, public equity continues to be the favoured asset class by those surveyed.

Long bonds and credit are expected to be the poor relations. Even allowing for the inherent optimism, which tends to be part of an investment manager's DNA, the survey provides additional food for thought for pension plan sponsors as they seek to address various risks. "Although the increase in allocation to alternative investments is anticipated to be limited, this space is rich with a diverse set of opportunities," continued Mr. Hindocha.

"In addition to the 'usual suspects', managers anticipate allocations to infrastructure, commodities and other assets such as timber. This suggests that we may be some way from the day that bonds are the only game in town."

In nearly every region, the majority of investment managers surveyed expect pension funds to increase allocations to alternative investments modestly, generally by less than 5%. The shift is expected to be greater in the United States, where nearly 60% of investment managers expect allocations to alternative investments will increase by 5% to 15%, or more.

Alternative classes expected to see the largest increased allocations are:

-- Private equities in every region
-- Hedge fund of funds in every region but Canada
-- Single manager hedge funds in Australia and the United States
-- Real estate in Singapore and the United Kingdom
-- Commodities in Europe and the United States
-- Infrastructure and currency overlays in Canada
"At a time when many plan sponsors around the world are challenged by contribution requirements and new accounting standards, there is exceptional pressure to reassess and, where necessary, reposition investment strategies," said Rich Nuzum, worldwide partner and Americas business leader for Mercer Investment Consulting. "The survey results are consistent with a view that plan sponsors will continue to react to these pressures in part by seeking increased diversification as well as return enhancement, including by continuing to increase their exposure to alternative asset classes."

Economic forecasts

Evaluating the global economy, the investment managers participating in the Mercer Investment Consulting survey predict global real GDP will increase by 3.1% (median projected growth) over the course of 2006, which is in the middle of the 2% to 5% historical growth in global GDP. Regionally, investment managers expect the highest GDP growth in Singapore (5.0% at the median), followed by the US (3.5%), Australia (3.3%) and Canada (3.0%). Slower growth is expected in the UK (2.1%) and Europe (1.9%).

The 2006 rate of inflation in most countries is expected by survey respondents to be at about the same or lower levels than were experienced in the last twelve months. The highest predicted inflation rates are in the United States and Australia, both at 3%, while the lowest predicted inflation is in Singapore at 1.6%.

A significant proportion of investment managers in every region expect a rise in client demand for integrating consideration of environmental, social and corporate governance (ESG) issues into investment decision making over the next three years. UK and European managers view client support for ESG as being most prevalent, while those in the United States predict the least client support. Almost half the UK investment managers (47%) expect clients will want specialist investment strategies based on ESG analysis.

Mercer has conducted Fearless Forecast surveys in many regions of the world for a number of years. This year's global Fearless Forecast survey may be downloaded free of charge at www.merceric.com/2006fearlessforecast . In February 2006, complete ESG issue findings will be available at www.mercerIC.com .

Mercer Investment Consulting is a leading global provider of investment consulting services, and offers customized guidance at every stage of the investment decision, risk management, and investment monitoring process. Our objective is to help clients make better investment decisions, increasing expected returns while managing risk and cost. We work with the fiduciaries of pension funds, foundations, endowments, and other investors in more than 35 countries.

Throughout most of the world, Mercer Investment Consulting is an autonomous unit within Mercer Human Resource Consulting LLC, a wholly owned subsidiary of Marsh & McLennan Companies, Inc. (MMC). MMC lists its stock (ticker symbol: MMC) on the New York, Chicago, Pacific, and London stock exchanges. In the US, the investment consulting business is operated through Mercer Investment Consulting, Inc., a wholly owned subsidiary of Mercer Human Resource Consulting, Inc., the US operating unit of Mercer Human Resource Consulting LLC.

Index Definitions

The MSCI World Index(SM) is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. As of May 2005 the MSCI World Index consisted of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States.

The MSCI EAFE(R) Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the US & Canada. As of May 2005 the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

The MSCI Emerging Markets Index(SM) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of May 2005 the MSCI Emerging Markets Index consisted of the following 26 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela.

The MSCI USA Index(SM) is a free float-adjusted market capitalization index that is designed to measure US market equity performance.

MSCI Index (R), (TM), (SM) are the property of Morgan Stanley Capital International Inc. or its affiliates. All MSCI data is provided by MSCI "as is".

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