GLOBAL – State Street Global Advisors’ chief investment officer Alan Brown says the developed world’s retirement systems are “not well placed” to withstand prolonged poor returns from stocks.

Brown, in a research note previewing the markets in 2003, says investors should plan for a “modest single digit return” in stock markets. But he sounded a note of caution, saying that the outcome “could realistically be anywhere in a plus or minus 25% range”.

The reality, he says, is that in the US and elsewhere, “investment returns from stocks can be disappointing over extended periods of time”.

“Our retirement systems are not well placed to withstand this,” Brown says. “Just three years of famine has put the system in jeopardy even after all the years of feast in the 80s and 90s.”

Brown also identifies the German economy as a potential risk in the coming year. “Watch Germany closely,” he says. He highlights Germany’s “policy mistakes” as one of the top five issues for investors to watch in 2003.

He says Germany is making the same policy mistakes as in the 1920s. The country joined the euro at around 20% too high an exchange rate, he says, making exports less competitive. With low inflation compared to the Euro-area average, Brown says, German interest rates are too high.

“On top of that, the government is tightening fiscal policy at a time when nearly all economic indicators are pointing south,” Brown says. The combination of these factors is likely to drive Germany into recession, or worse, deflation.

Brown bemoans the lack of a transfer payment system in the Euro-area, which he says means the bloc is “by its very design” cyclical and destabilising.

His other areas of concern are valuation, growth and war. “Valuation measures are not particularly helpful right now in calling the market,” he says, adding that there is “considerable ambiguity over what the E in P/E ratios should be”.

As for growth, he says SSgA expects US economic growth to be around 2%-3%.

For war, Brown sees the potential war between US-led forces and Iraq should have “little lasting impact on the market” – if it’s over quickly and the “good guys” win, the war does not spread and oil supplies are not interrupted.

“If I am wrong on any of these assumptions, the outlook could be negative indeed.”