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It warned that untested policy prescriptions from governments and central banks – which it has termed ‘test tube policies’ – could further contribute to significant market volatility. ING IM also said that much of the ‘developed’ world has made only 30% – 40% of the adjustments needed to adapt to the new environment and challenges, and estimates there is a 60% chance that global economies and markets will ‘muddle’ through 2011.

Valentijn van Nieuwenhuijzen, Head of Strategy, Strategy and Tactical Asset Allocation Group, said: “We are likely to face a tough and volatile economic and investment environment next year with the divergence between the emerging and developed economies widening further. Companies and investors will also need to brace themselves for unexpected consequences from the ‘test-tube’ macroeconomic strategies being employed by governments and central banks.”

ING IM expects real global GDP growth to be around 3.8% in 2011, compared with its forecast of 4.8% for 2010. The expansion in GDP is projected at 6.5% next year (2010: 8.1%) in the emerging economies and at 1.6% (2010: 2.2%) in the developed world, widening the economic performance gap between the two further.

These forecasts could be further modified by the possibility – put at 25% – that the world could lurch into another serious downturn, compared with a 15% chance of a surprise on the upside with strong economic growth. Developed economies may continue to be dominated by deleveraging and output gaps that would lead to deflation and low nominal growth.

Eric Siegloff, Global Head of Strategy and Tactical Asset Allocation Group, said: “Investors will need to take a much more dynamic approach to their investment strategies in the more turbulent and divergent financial market conditions we predict in 2011. This means a greater focus on growth, and in particular dividends, income and yield - or what we call ‘DIY’.

“With such a high degree of uncertainty, investors need better risk management and to take a more total return approach than one focused on benchmarks. In a low return world – which is what we are predicting – Beta alone will not deliver. You need to place a greater focus on asset managers who can consistently provide Alpha.”

ING IM believes that in such an uncertain environment with higher volatility, investors need to be more diversified and also more opportunistic in their investment behaviours and should frame their decision making process around three key areas:

Fundamental insight
* Business cycle
* Macro outlook
* Valuations

Market dynamics
* Sentiment
* Momentum
* Liquidity and flows

Risk control
* This needs to be integrated and cross-asset
* Investable risk factors
* Apply a limit on volatility

Eric Siegloff said: “The need for a more dynamic, adaptive asset allocation framework in this uncertain environment is clear. It is important to recognise that structural or temporary shifts in macro and market fundamentals are not always captured by ‘rule based’ signals; manager skill and experience play a key role here. Furthermore, it is important to ensure risk control at all levels of the investment process. Simply, it is better to overestimate risk rather than underestimate risk.”

Outlook for Major Investment Asset Classes in 2011

During its Annual Outlook Conference, ING IM provided the following forecasts for the major investment asset classes in 2011:

Equities
ING IM believes that the key drivers for the equity markets in 2011 will be positive earnings growth, attractive valuations, abundant liquidity and strong corporate wealth. These will underpin three strong themes for next year – sustainable income and growth, increased corporate spending, and emerging markets.

Sustainable income and growth: Here, dividends will become an even more important income generator, whilst low payout ratios, strong balance sheets and high profitability will support further growth.

Corporate spending: Corporate confidence is rising, and strong cash flows and balance sheets will lead to increased activity in buybacks, dividends, M&A activity and Capex.

Emerging markets: There are still many attractions here for investors, including low public and private debt levels and high economic growth. ING IM still believes that emerging market equity valuations are not in ‘bubble’ territory as some market commentators claim.

Patrick Moonen, Senior Equity Strategist, Strategy and Tactical Asset Allocation Group, said: “The 2011 outlook for equities is good and we expect returns to be in line with earnings growth. However, investors will need to focus on yield and also growth markets, whilst any increase in corporate spending will be the icing on the cake.”

Fixed income
ING IM believes that bond yields will remain low and risk premiums attractive. The Treasury markets will remain supported by low central bank rates, quantitative easing and disinflation.

Valentijn van Nieuwenhuijzen said: “Fixed income investors need to search harder for yield and this will mean a growing focus on emerging market debt, which is becoming increasingly more attractive. However, liquidity will be a key factor for investors next year, and so this asset class may also suffer in this area.”

FX
ING IM believes there is a low risk of the current so-called ‘FX War’ turning into a trade war. However, 2011 will lead to a clearer distinction between the FX winners and losers. ING IM anticipates a constructive policy ‘solution’ for global FX tension and therefore forecasts further appreciation of emerging market currencies against developed market currencies. Within the developed world the USD is expected to weaken further in the short-term on the back of more aggressive QE measures in the US.

Importantly, many trends and diverging patterns remain present in FX markets. Given this, ING IM believes that investors need to place more emphasis on FX as an asset class. It offers a large and relatively uncorrelated opportunity set to generate Alpha and associated returns.

Real estate
Real estate outperformance could continue in 2011. ING IM says there are a number of supporting factors for this prediction – notably that many listed real estate companies have refinanced and that the underlying commercial property is at a turning point on vacancies and rents, while dividend yields in the developed markets are attractive.

Commodities
Commodities remain underpinned by growth in the emerging markets, so investment demand will continue in 2011. ING IM believes that next year precious metals will be the main beneficiary in the commodities markets followed by industrial metals. Gold will continue to benefit from a number of factors including: flight to quality, central banks becoming net buyers, and gold mine supply being constrained.

However, ING IM warns that there are a number of risks facing the commodity markets next year including global industrial production and world trade levelling off, errors or tightening in China’s economic policies and the possibility of currency wars escalating into trade wars.

(press release)

Profile: ING Investment Management
ING Investment Management (ING IM) is a leading global asset manager with approximately EUR 376 billion of assets under management. Employing over 3,500 people ING IM is active in 33 countries across the Americas, Asia-Pacific, Europe and the Middle East. ING IM is the principle asset manager of ING Group, a global financial services company.

ING IM applies its proprietary research and analysis, global resources and risk management to offer a wide variety of strategies, investment vehicles and advisory services in all major asset classes and investment styles. Visit www.ingim.com for more information.

- FG