SWIP expects total returns (capital growth plus dividend income) from European equities of around 12% next year because of accelerating profit growth and increased merger and acquisition activity. But this, the study warns, will fall to an average 8.5% over the next four years.

The fund manager's reported states that European bonds, like those in other markets, are expensive at current levels. "We expect yields to rise moderately over the next year as global growth holds up, the European recovery becomes better established and US yields correct upwards," the report notes.

SWIP also says that the continued long-term performance of real estate relative to equities and bonds had raised its profile among pension and insurance funds. These institutions are increasing their investment allocation from a European average of just 7% of portfolios in the case of pensions. But to ensure continued strong performance of their property holdings, investors need to diversify into other European markets, the report adds. This would enable them to "capture higher cross-border returns and benefit from the low correlation real estate has with other asset classes at an international level."