Investment managers are less optimistic on the prospects for U.S. economic growth in the near term and more concerned about the potential impact of an emerging markets slow down on stock prices, according to a quarterly survey by Northern Trust Asset Management.
The survey of approximately 100 money managers, taken in mid-September, found a sharp drop-off in expectations for U.S. growth: only 29 per cent expect growth to accelerate over the next six months, down from the 54 per cent who expected accelerating growth in the previous quarter’s survey and the smallest portion in the past three years with that view.
With global market volatility in August and early September as a backdrop, investment managers ranked a slow down in emerging markets as the top risk to equity markets. In the previous quarter, emerging markets had been ranked last of eight possible risks to equities. A change in U.S. monetary policy, which was ranked as the top risk to equities in the previous two quarters, fell to fourth place in the third-quarter survey.
“On a number of measures, managers have become less confident in their outlook,” said Christopher Vella, Chief Investment Officer for Multi-Manager Solutions at Northern Trust Asset Management. “In line with their views on the U.S. economy, fewer managers expect increases in U.S. corporate revenue and housing prices than in the previous several quarters, while the number of those expecting steady or stable growth has increased.”
After stock market volatility hit record levels during the August market sell-off, nearly 20 per cent of managers expect market volatility to decrease in the next six months, compared to just 1.4 per cent with that view in the previous survey. A majority, nearly 60 per cent, believe volatility will increase, but that is down from 74 per cent with that view in the previous survey.
“Almost one in three managers is taking advantage of market volatility,” said Mark Meisel, Senior Investment Product Manager for Multi-Manager Solutions at Northern Trust Asset Management. “Thirty per cent of managers reported that have slightly increased their turnover to take advantage of market opportunities over the past quarter. At the same time, 20 per cent have reduced their foreign currency exposure due to volatility in currency markets.”
Other findings of the third quarter survey include:
Concern over a slowdown in China was listed as the top reason for the equity market sell-off in August and early September. Concern over the timing of a U.S. Federal Reserve interest rate increase was second, and continued weakness in the price of oil and other commodities was third.
66% of managers expect little impact to financial markets if the Fed raises short term interest rates in 2015, because it is already priced in to markets. However, 20% believe it will lead to additional U.S. dollar appreciation and to emerging market declines.
Investment-grade corporate bonds, U.S. high yield, global high yield-ex. U.S., and floating rate loans were ranked as the most attractive segments in the current fixed income environment. Asset-backed securities, emerging market bonds (U.S. dollar) and emerging market bonds (local currency) were ranked least attractive.
52% of managers view emerging market equities as undervalued, up from 38% with that view in the previous quarter; 49% believe European equities are undervalued, down from 52% with that view previously. Views on U.S. equities were mixed, with the largest portion, 37%, viewing the S&P 500 Index as overvalued by as much as 10%.
Managers were most bullish on non-U.S. developed equities and U.S. small-cap, and most bearish on U.S bonds and emerging market debt.
For its survey, Northern Trust polls investment firms that participate in its multi-manager investment programs and funds. The select group of respondents includes fixed income and equity managers across value and growth styles, with a bias toward fundamental, bottom-up stock picking strategies. The survey is conducted quarterly so that Northern Trust and participating managers can examine trends in attitudes and allocations. The full Investment Manager Survey Report and a video on survey highlights can be found on Northern Trust’s web site at www.northerntrust.com/managersurvey.
Northern Trust Asset Management is a leading provider of multi-manager investment solutions, with more than $100 billion in assets ($61.6 billion in assets under management and approximately $38.6 billion under advisement) as of June 30, 2015, for institutional and personal clients. Northern Trust invests with more than 300 external managers worldwide, offering personal and institutional solutions that include outsourced chief investment officer (OCIO) services, alternative asset classes, single asset class solutions and emerging manager programs.
