Investment managers expect the U.S. economy to remain stable but view U.S. equity valuations as expensive, according to the Northern Trust Asset Management quarterly Investment Manager Survey of approximately 100 investment firms, which was conducted June 7-22, 2017.
US equity valuations are getting uncomfortably high from the perspective of many investment managers: only 36% of managers believe they are undervalued or fairly valued, the lowest percentage since the survey began in the third quarter of 2008. Managers are also concerned that market volatility measures such as the Chicago Board Options Exchange Volatility Index (VIX) are suggesting too much complacency in the markets; 63% believe this is a warning sign which may lead to a sell-off.
Most investment managers expect U.S. economic growth to remain stable, 60%, but fewer expect growth to accelerate, 29% down from 44%. The outlook for earnings is favorable, 50% of managers expect U.S corporate earnings growth to increase – up from 46%. 66% expect interest rates to rise, down from 79%, and 42% expect inflation to increase, down from 63%.
“Although managers view U.S. equity valuations as extended, fundamentals - GDP growth, low inflation and earnings growth - are still favorable,” said Christopher Vella, Chief Investment Officer for Multi-Manager Solutions at Northern Trust Asset Management. “Even though survey respondents over the past few quarters have been increasingly less positive on U.S. equity valuations, the U.S. equity market has been resilient and has provided good returns.”
A sizeable minority of investment managers, 43%, believe there is a moderate to strong chance that policy disagreements between the U.S. and its trading partners and allies might negatively impact the financial markets.
Although the Trump administration is looking to roll back some of the financial regulations put in place after the financial crisis, about half, 49%, of managers describe the cost to their firm of addressing these requirements as modest but an evident portion of their incremental costs over the past few years. 47% describe regulatory costs as still increasing and 49% believe they are plateauing.
Investment Risks and Portfolio Positioning
In regard to global equity market risks, geopolitical risks became top-ranked and trade policy dropped to fourth from first. A U.S. economic slowdown rose from seventh to second. U.S. corporate earnings ranked third.
82% report portfolio cash levels unchanged and in line with historic norms. Most managers, 62%, have not changed their portfolios’ risk aversion over the past three months; 33% are more risk averse, higher than average; and only 4% are less so – a drop from 14%.
Equity Valuations by Region and Sector
Nearly two-thirds, 65% percent, of managers believe U.S. equities are overvalued, the highest percentage in the survey’s history. European and emerging market equities are viewed as most attractively valued; 86% believe European equities are undervalued or fairly valued; and 88% believe emerging market equities are undervalued or fairly valued.
Within U.S. sectors, 39% view financials as undervalued, followed by 32% for both energy and health care. Only 6% view consumer staples as undervalued and 15% said the same for information technology.
“Managers view emerging market equity valuations favorably and are most bullish on that asset class,” said Mark Meisel, Senior Investment Product Manager for Multi-Manager Solutions at Northern Trust Asset Management. Managers also responded that within emerging and frontier equity markets, India, China and Brazil have the best investment opportunities over the next two to three years and that the frontier markets, Russia and South Africa, have the least.
After emerging market equities, managers rank non-U.S. developed equities second on bullishness. This is in line with last quarter’s ranking. U.S. small cap rank third. Managers were the most bearish on U.S. fixed income (Barclays Capital Aggregate Bond index), followed by hedge funds and commodities.
Regarding industry sectors, managers are most bullish on information technology again this quarter. Healthcare ranked second, followed by financials. The sectors managers are most bearish about are utilities, consumer staples and energy.
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 can be found on Northern Trust’s web site at www.northerntrust.com/managersurvey.
About Northern Trust Asset Management
Northern Trust Asset Management is a leading global asset management firm serving institutional and individual investors in 29 countries. Our robust investment capabilities span all markets and asset classes, from passive and risk-factor to fundamental active, multi-asset class and multi-manager strategies, delivered in multiple vehicles. As of June 30, 2017, Northern Trust has $1.03 trillion in total assets under management. For more information, please visit our website or follow us on Twitter @NTInvest.
Northern Trust Asset Management comprises Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc. and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
About Northern Trust
Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has offices in the United States in 19 states and Washington, D.C., and 22 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of June 30, 2017, Northern Trust had assets under custody of US$7.4 trillion, and assets under management of US$1.03 trillion. For more than 125 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit northerntrust.com or follow us on Twitter @NorthernTrust.
Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at https://www.northerntrust.com/disclosures.