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The Search for Growth: Balancing Yield and Risk in Uncertain Times

April 2013

Sponsored by BNY Mellon; Written by The Economist Intelligence Unit

Executive Summary

In the context of complex, ever-changing risk scenarios, autopilot is not an option for today's global investor. More than ever, the search for growth requires a nuanced understanding of the global investment climate and real-time awareness of the economic, social and political shifts taking place in far-flung places. As the stellar performance of many EU equity indices in 2012 indicates, investors can find opportunities in crisis-ridden developed economies, with many now pinning their hopes on a durable U.S. recovery. For higher returns, investors mostly look to emerging markets. While economic growth in emerging economies continues to outpace growth in the developed world, most emerging markets remain shallow, illiquid and opaque, thus increasing the volatility of prices and the risk of bubbles.

At the start of 2013, despite setbacks from recent financial crises, investors remain bullish on China and the U.S., as well as on industries such as oil and gas, agribusiness, healthcare and information technology (IT). Their optimism about short-term gains in these categories is tempered, however, by long-term concerns about structural weaknesses in the global economy. Investors express frustration about unsustainable levels of debt and increasing income gaps in developed economies as well as economic slowdown or overheating in emerging markets.

This year, investors are most optimistic about quick returns in sectors such as oil and gas and agribusiness. But their bullishness on commodities has waned since 2011 — the year we launched our annual survey. Investors are now diversifying portfolios away from commodities and into value added sectors such as technology and services.

While the rise of the emerging world is driving up demand and prices for finite natural resources, commodities as an asset class have underperformed equities in the past year.

Key findings from this year's report include:

  • A staggering 72% of international investors in 2013 expect the global economy to improve — a significant increase compared with 2012, when 57% expected growth in the global economy.
    Asian investors are particularly optimistic (80%), followed by Europeans (72%) and North Americans (67%). Lingering uncertainties exist, however, regarding the EU's growth prospects and the impact of tighter U.S. fiscal policy.
  • Investors are still bullish on China, yet they are increasingly looking to the U.S. and a wider range of emerging markets to bolster returns.
    When investors were asked to select the three best regions for asset price growth, 46% chose the U.S., 42% chose China, 34% chose Southeast Asia, 30% chose Brazil and 27% chose India. Both India and — to a lesser extent — Brazil have fallen out of favour in the past three years. India was picked by 56% of investors as offering the best prospects for growth in 2011, but only 31% said the same this year. Disappointment at a slowdown in growth in Latin America's largest economy has allowed Southeast Asia to overtake Brazil this year to gain the third slot in investors' preferences.
  • In 2013, the U.S. eased ahead of China to top investors' list of markets with the best potential for asset price growth in the next 12 months, but opinion is divided regarding longer-term U.S. investment prospects.
    Some believe that the U.S. economic recovery — led by housing, manufacturing and energy — will be sustained. Others are less sure, viewing the U.S. as "the best of a bad bunch" of developed countries saddled with unsustainable debt, weakening infrastructure and growing income disparities.
  • In the past three years, investors have become markedly less bullish on oil and gas, mining and agribusiness, and more enthusiastic about healthcare and IT.
    Expectations regarding returns from investments in financial services have fluctuated, but have risen from last year — led by retail and investment banking opportunities in Asia and Latin America. This year, 30% of survey respondents listed oil and gas as representing the best prospect for revenue growth in the next 12 months, followed by IT (27%), agriculture and agribusiness (26%), healthcare (26%) and financial services (21%). In 2011, oil and gas and agriculture were cited as the best prospects by 45% and 38% of respondents, respectively.
  • Investors expect the highest returns from equities this year. Meanwhile, with sovereign debt burdens still rising across much of the OECD, government bonds have been called into question.
    Our survey shows that 53% of investors expect stocks to be the strongest-performing asset class over the next 12 months. Equities in China, Southeast Asia and the U.S., in particular, are expected to produce strong asset price growth. On the other hand, 22% of investors rated government bonds as most likely to increase in risk over the next 12 months.

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About this Report

Preparing for "black swan" events is not possible, but a thorough understanding of the risks in our diverse global marketplace provides a good early detection system. The search for growth: Balancing yield and risk in uncertain times is the third annual report produced by the Economist Intelligence Unit and sponsored by BNY Mellon. The paper draws on the perspectives of top institutional investors, as it explores the global investment environment in 2013.

As an annual global survey, "The search for growth..." serves as a yearly barometer of investor sentiment regarding global risks and scenarios with the potential to affect portfolios and businesses. It highlights survey responses from 2013 and year-on-year shifts in investor sentiment since our 2011 and 2012 surveys.

In January 2013, the EIU conducted its third annual survey of more than 700 institutional investors and corporate executives from around the world. As in previous years, to complement the survey results, we carried out a series of in-depth interviews with leading global pensions sponsors, economists, and private equity and hedge fund managers. Insights from the interviews appear throughout the report.

The Economist Intelligence Unit bears sole responsibility for the report and its content; the views expressed do not necessarily reflect those of the sponsor, BNY Mellon. The paper was written by Anna Bernasek and edited by Janie Hulse.

Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper.

The following regulatory disclosure language only applies to BNY Mellon and the distribution of this report by BNY Mellon. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. The statements and opinions expressed in this report do not necessarily represent the views of BNY Mellon or any of its respective affiliates. The information in this report is not intended and should not be construed to be investment advice in any manner or form; its redistribution by BNY Mellon may be deemed a financial promotion in non-U.S. jurisdictions. Accordingly, where this report is used or distributed in any non-U.S. jurisdiction, the information provided is for use by professional investors only and not for onward distribution to, or to be relied upon by, retail investors. · This report is not intended, and should not be construed, as an offer or solicitation of services or products or an endorsement thereof by BNY Mellon in any jurisdiction or in any circumstance that is otherwise unlawful or unauthorized. BNY Mellon Asset Management International Limited and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. · Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested.