Carl Hess, global head of investment at Towers Watson, said, “Eurozone countries face highly political, long-term structural reforms, as well as fiscal austerity, which are proving difficult to implement, pushing out further any real global recovery. Politics have become increasingly enmeshed in the financial world since the global economic crisis began, and investment managers have again identified this as the top issue for them. There are some positive economic signals coming out of the U.S., which, even though driven largely by government policies, seem to be reflected in managers’ view that the U.S. is the region with the most rewarding investment opportunities in 2013, followed by China, the Eurozone and frontier markets. While government policies are clearly intended to stimulate growth and address the massive U.S. fiscal deficit, we see the risk skewed toward deflation rather than inflation. That said, the housing market still remains key to a U.S. recovery — if the headwind of negative equity can be overcome.”In contrast to last year, managers expect better equity returns in 2013 in most markets than they did in 2012, with the exception of the U.S. and Australia, where equity return expectations are the lowest they have been since the survey started in 2008. In addition, managers anticipate equity returns to remain muted over the longer term, but indicate a preference toward the U.S. and China, and away from the Eurozone. They expect equity markets in 2013 to deliver returns of 7.0% in the U.S. (compared to 8.0% in 2012), 6.0% in the U.K. (5.0%), 7.0% in the Eurozone (6.0%), 6.0% in Australia (7.0%), 6.0% in Japan (5.0%) and 10% in China (7.8%). The survey also shows that expected equity volatility for 2013 is in the 15% – 20% range for major economies, somewhat lower than previous years, but still elevated compared to longer-term averages. Most managers in the survey hold overall bullish views for the next five years on emerging market equities (83% vs. 75% in 2012), public equities (78% vs. 72%) and real estate (57% vs. 48%). For the same time horizon, the majority remains bearish overall on nominal government bonds (80% vs. 77% in 2012), money markets (47% vs. 43%), investment-grade bonds (47% vs. 29%) and inflation-indexed government bonds (47%, same as 2012).