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Growth momentum could weaken in the second half

Although fund managers are now more optimistic about the economy compared to 6 months ago, they are concerned that the momentum could ease in the coming months as government stimulus wanes.

The uncertain prospects for the global economy in the second half coupled with other headwinds are likely to keep investors jittery.

Lion Global Investors cautions that markets are likely to remain volatile until such a time as economic data becomes clearer, especially with respect to U.S. employment trends and credit worthiness among European markets.

Allianz Global Investors observes that the leading indicatorsRefer to economic data or other indicators that can help to predict future economic trends. have started to roll over not only in developed but also emerging markets.

Fidelity International says it recently turned more cautious as the global inventory rebuild is in an advanced stage and leading indicators are either at peak readings or rolling overIn context of the article, it implies that leading indicators which predict the direction of the economy appear to have peaked and are now starting to show signs of weakness..

First State Investments also warns that the rising uncertainty among European economies has raised concerns about the sustainability of global economic recovery.

Silver lining seen in U.S. and emerging market economies

Despite concerns about Europe, some fund managers are more positive about the U.S. economy and emerging markets.

Blackrock Investment Management for example, says that the recovery in U.S. and emerging markets is playing out much better than expected, with the strong private sector performances sustaining the recovery.

Templeton Asset Management is also optimistic that the recovery in emerging markets is sustainable in view of their strong fundamentals.

UOB Asset Management sounded a positive chord about the U.S. economy. It says that the jobs recovery in the economy is stronger than that seen in 1974 and 1983, while retail sales, excluding autos and housing materials, have already surpassed 1997 peak levels.

Still positive on equities in the medium to long term

Despite the recent turbulent stock markets, most fund managers stay positive in their outlook for equities in the medium to long term, making it their preferred asset class at this point.

UBS Global Asset Management says that although equity markets have rallied last year, both developed and emerging market equities are still attractive from a valuation perspective.

Schroder Investment Management sees the prolonged period of low interest rates and the recovery in corporate profits over the coming months as bearing positive effects for equity markets.

Henderson Global Investors is also positive here because investors are still relatively cautious and underexposed to equities. It also sees inflation rising in the medium term, which should favour corporate earnings.

Deutsche Asset Management however, cautions that current equity returns may not be as strong as last year, and views dividends as an important part of investment returns.

Equity markets favoured by fund managers

Lion Global is positive on Asia ex-Japan markets for the long term, given the sound economic foundation and wealth creation throughout the region.

Aberdeen Asset Management also favours Asia and emerging markets because it believes in the long-run structural improvement of emerging economies and the performance of their markets.

ING Investment Management prefers emerging markets as it sees its growth as being the highest and most sustainable. Also, it says that sovereign debt worries are mainly from developed markets and less of a concern in emerging markets.

DBS Asset Management favours Asia ex-Japan over the G3 countries, and within the G3 countries, it prefers the U.S. over Europe and Japan.

Blackrock also likes the U.S. and emerging markets as they have shown the most convincing signs of economic recovery.

Phillip Capital Management said it is becoming increasingly bullish on Japan, which is attractively valued after 'two lost decades'. Japan is also taking advantage of strong growth in emerging markets, especially in infrastructure spending.

Asian markets preferred

Interestingly, many fund managers are positive on Chinese equities, which have corrected sharply during the first half of 2010, despite market concerns about China.

APS Asset Management says it is positive on China as it seems to be weathering the current financial storm very well.

BNP Paribas Investment Partners sees the Chinese market bottoming and said that it may exit its consolidation phase in the coming months.

First State Investments says that China offers investment opportunities in a number of growth companies with strong balance sheets and a good franchise.

Elsewhere, Aviva Investors favours trade-oriented markets like Singapore and Taiwan which also offers significant cyclical consumer exposureUsed in reference to Singapore and Taiwan where consumers are likely to spend more if the global economic cycle turns favourable..

Prudential is positive on South Korea due to its relative valuations, competitive currency and global cyclical leverage. It is also positive on Indonesia due to the country's structural economic improvements.

Selective opportunities seen in bond markets

Although most fund manager seem to prefer equities and riskier assets at this point, some of them see selective opportunities in bond markets as well.

Lion Global likes short term high grade investment credits and selectively, high-yield Asian bonds, given the attractive yield differential between high-yield and high-grade bonds.

BNP Paribas likes high-yield corporate bonds as these bonds provide ample returns relative to the underlying risk.

Schroders is also positive about high-yield bonds. It says that while high-yield spreads have narrowed, they continue to look attractive, in comparison to conventional equivalents on valuation grounds.

First State and UOB like Asian credits given the good growth prospects in Asia and strong corporate balance sheets in the region.

Mixed outlook for commodities

Fund managers offer a mixed outlook for commodity markets in the short term. Some are positive on base metals and precious metals like gold due to strong demand, while others are cautious about agricultural commodities and oil, due to supply factors.

Fund managers also say that the U.S. dollar's short term strength could weigh on commodity prices.

The Real Deal

Fund managers are clearly concerned about uncertainties and risks looming on the horizon, a warning to investors not to throw caution to the wind.

Sovereign debt woes in developed markets (especially in Europe) and inflation and the development of asset bubbles in Asia (especially in China) are among the key risks highlighted by fund managers.

Despite the risks, fund managers say investors should not lose sight of the longer term and turn overly cautious. They highlight periodic investments and diversification as strategies for investors to consider, especially in the current volatile markets.

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