The Australian bond market is expected to outperform all others this year, according to an annual survey of investment managers conducted by Mercer Investment Consulting.

The survey, of 157 firms around the world, nine of which were Australian, was generally bullish for markets in 2006, as others and single-manager forecasts have been. Although, in keeping with the consensus, managers believe that equities will be more subdued than they have been. For bonds, they predict a modest return of 4.0 per cent for the Citigroup World Government Bond Index. “The majority of investment managers expect bond yields to rise, and both investment-grade and non-investment-grade bond spreads to widen in 2006,” the survey results say. The best-performing country bond market is expected to be Australia, followed by the US, UK and New Zealand. Equities, alongside private equity, are expected to provide the best-performing asset classes overall in every region, both for the year and over the next five years. Over the longer term, the managers also expect commodities in every region and real estate in Singapore (only) as top performers. While in nearly every region investment managers tip only a modest rise in the use of alternative investments – generally less than 5 per cent – in the US almost 60 per cent of managers expect a rise in allocations to alternatives of between 5-15 per cent. Among the alternatives, those expected to get the largest allocations include private equity in every region, hedge funds-of-funds everywhere except Canada, single-manager hedge funds in Australia and the US, real estate in Singapore and the UK, commodities in Europe and the US, and infrastructure and currency overlays in Canada. For broad market equities, the managers expect, on average, that the MSCI World Index will increase 7.6 per cent in 2006. This compares with a rise of 9.5 per cent in 2005.

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