During the first half of 2010 asset managers intend to reduce their allocation to bonds in anticipation of higher interest rates during the second half of the year. Credit spreads are expected to tighten further during a period of stronger economic growth, benign inflation and rallying markets. This scenario is based on the responses of a bi-annual bfinance poll of eight asset managers with €2.3tr in AUM (see table for participating firms and forecasts). Survey results show the average tactical bond allocation dropped from 46% to 37%. At one extreme, Henderson suggests a complete liquidation of its fixed-income holdings.

The polled managers anticipate only a modest rise in US and European rates, with 10-year government yields rising 20bps and two-year yields rising 30-60bps. The managers are looking for continued spread compression in the high grade and non-investment grade sectors. Equity accounts on average for nearly half of the allocation in the sample group. Having underestimated the dizzying rally between July and December 2009, they now anticipate equity indices to advance 10% in 2010 with most of the gain expected in the first half of the year. In the short term, the managers reserve their most pessimistic assessment for the Japanese equity market. Looking three years out, emerging markets promise the best return potential (36.4%), followed by Asia ex-Japan (29.6%).

The managers signal that they are more likely to seek out alternative mandates, investing in commodities and property rather than commit to equity to which they have an exposure that is on average 3% above benchmark. This represents a move to riskier assets and corroborates the findings of our global pension fund survey (see accompanying survey). Finally, the managers are more optimistic about growth prospects than they were six months ago, anticipating the European economy to expand by 1.5% in 2010 and 2% in 2011 compared to 2.5% and 2.6% in the US.

Consensus spreadsheet

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