Alternatives forecast to shine in 2005

Australian investment managers are predicting a jump in demand for alternative investments in 2005 as investors go in search of opportunities in a slowing equities market.

Listed Property Trusts (LPTs), by contrast, are expected to fall markedly out of investor favour during the year, according to Mercer Investment Consulting's 2005 'Fearless Forecast' survey.

More than 200 global investment managers managing US$8 trillion - including 18 from Australia - participated in the survey, which provides one-year performance predictions for local and global economies and capital markets.

Mercer's global head of strategic research Garrie Lette said 68 per cent of surveyed Australian investment managers predicted an increase in alternative investment mandates during the year.

Lette said the spread across alternatives was relatively even, with infrastructure expected to be marginally more popular among investors than other areas, such as hedge funds and private equity.

Listed property securities however were "clearly out of favour" among surveyed Australian managers for 2005, according to Lette.

"None of the managers predict a top two position for LPTs, and fully 30 per cent expect it to be one of the bottom performing sectors this year.

"LPTs have had a great run in recent years, providing a boost to overall returns for diversified portfolios. But managers are expecting much weaker results in 2005, and if they're right overall returns will be softer," he said.

Opinion was divided evenly over the outlook for other sectors of the share market, most obviously for financials.

Lette said the number of managers predicting the sector to be among the bottom performers was almost equal to those expecting it to be a top performer. Overall, he said, materials is clearly the favourite sector for 2005, followed by energy.

Two-thirds of all surveyed managers predicted the Australian equity market to outperform global markets for the sixth year running.

Australian managers predict an average return of 8.2 per cent for the MSCI in 2005, while global managers predicted it would return 7.7 per cent.

The Australian managers were also "in general agreement" that the local equity market will deliver on average 8.6 per cent for the ASX 200 in 2005, Lette said.

They cited corporate profits, the domestic economy and the global economy as the top three issues that would drive equity market returns this year, with the performance of the Chinese market a close fourth.

Based on average survey predictions, the key economic indicators are not expected to deliver any surprises this year, with little variation or concern around inflation, exchange rates and interest rates.

"It is clear the market is refocusing on fundamentals and has shifted its concern from terrorism and other potentially isolated incidents that are difficult to predict," Lette said.