The possibility of a change in U.S. Federal Reserve monetary policy or its "quantitative easing" stimulus program poses the greatest risk to equity markets over the next six months, according to a quarterly survey of investment managers by Northern Trust.
The survey of approximately 100 investment managers was taken June 6-21, as the financial markets were reacting to comments by Federal Reserve Chairman Ben Bernanke and others regarding the future of Fed policy. A majority of respondents, 62 percent, said comments indicating the Fed would slow the pace of its bond purchases under the quantitative easing or QE program would lead to higher interest rates in the next three months. A change in Fed policy also displaced a European debt crisis as the greatest potential risk to equity markets in the next six months, according to a ranking by managers in the survey.
After two quarters of rising optimism on the U.S. economy, the survey found tempered enthusiasm on housing prices and jobs, although managers still hold positive views on the U.S. economy and stock market. For example, 76 percent of managers expect housing prices to rise in the next six months, but that figure is down from 88 percent in the first quarter survey. Meanwhile, 22 percent of respondents expect housing prices to remain stable, up from only 9 percent who held that view in the previous quarter.
On jobs, too, there was a shift in expectations from accelerating improvement to stable, slower growth. More than half (57 percent) of respondents expect stable job growth in the next six months, while those expecting accelerating job growth fell to 29 percent from 38 percent in the first quarter survey. However, the vast majority of managers, 87 percent, expect U.S. corporate profit growth to increase or remain the same in the next three month, down only slightly from the previous survey.
"Monetary policy announcements in the U.S. have led to increased volatility in equity markets," said Chris Vella, Chief Investment Officer for Northern Trust Multi-Manager Solutions. "Despite this volatility, most of our managers have a positive view on key economic indicators in the U.S., which may be why they continue to have supportive views on the U.S. equity market's current valuation."
Fully 77 percent of managers surveyed believe the U.S. equity market, as measured by the S&P 500 Index, is undervalued or appropriately valued, a small change from 73 percent with that view in the first quarter. U.S. Large Cap Equity and U.S. Small Cap Equity also topped the asset class rankings in the survey's "Bull/Bear Indicator."
Looking outside the U.S., managers were evenly split, 51-49 percent, on whether emerging market equities will outperform equities in developed markets like Europe and Japan during the second half of 2013. Emerging market equities are lagging developed markets year to date, while Japanese equity markets have moved dramatically since the accommodative monetary and economic policies initiated by Japanese Prime Minister Shinzo Abe. Nearly half (48 percent) of managers believe 'Abe-nomics' will benefit the Japanese economy, while 36 percent are uncertain. Perhaps due to strong performance in Japanese equities earlier this year, 33 percent of managers view this market as overvalued, up from 17 percent in the first quarter.
Investment managers were positive toward European equity valuations: 59 percent believe European equities are undervalued, up from 36 percent in the previous quarter. Only 9 percent of managers view the region's equities as overvalued, down from 26 percent in the first quarter'
"The valuation assessments of the various equity regions by investment managers reflected a fair amount of changes from the previous quarter," said Mark Meisel, Senior Investment Product Specialist of the Multi-Manager Solutions group, who oversees the survey. "This was probably due to the volatile and varied performance among the regions, with the U.S. equity market up just under 14 percent through June, emerging market equities down nearly 10 percent, European equities flat and Japanese equities up over 15 percent on a U.S. dollar basis."
Other insights from the survey include:
For more details, please see the full Northern Trust Investment Manager Survey Report at www.northerntrust.com/managersurvey.
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.
Northern Trust is a leading provider of multi-manager investment solutions, with more than $38.5 billion under management as of March 31, 2013, for institutional and personal clients. Northern Trust invests with more than 200 external managers worldwide, offering personal and institutional solutions that include retail mutual funds, alternative asset classes, emerging manager programs and total investment program management.
Asset Management at Northern Trust begins with listening and leads to answers beyond the expected for our clients. The multi-asset class investment management business is comprised of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., the investment advisor division of The Northern Trust Company and The Northern Trust Company of Connecticut and its subsidiaries which offer investment products and services to personal and institutional markets.
About Northern Trust
Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of investment management, asset and fund administration, banking solutions and fiduciary services for corporations, institutions and affluent individuals worldwide. Northern Trust, a financial holding company based in Chicago, has offices in 18 U.S. states and 17 international locations in North America, Europe, the Middle East and the Asia-Pacific region. As of March 31, 2013, Northern Trust had assets under custody of US$5 trillion, and assets under investment management of US$810.2 billion. For more than 120 years, Northern Trust has earned distinction as an industry leader in combining exceptional service and expertise with innovative products and technology. For more information, visit www.northerntrust.com or follow us on Twitter @NorthernTrust.