Investment managers characterize the U.S. economy as resilient, whether or not the Federal Reserve curtails its current quantitative easing (QE3) program, according to a survey by Northern Trust. The survey of approximately 100 managers, taken between September 4 and September 18, also found nearly all -- nine out of 10 -- expected the political stand-off over the federal government shutdown and the U.S. debt ceiling would have at most a modest impact on U.S. equity markets.
"Throughout 2013, investment managers have weighed the impact of politics and policy decisions against a steadily improving economy in their market outlook," said Christopher Vella, Chief Investment Officer for Multi-Manager Solutions at Northern Trust. "Regarding the budget stand-off, it seems as if Washington's continued infighting was not news to Wall Street, and managers expected that gradual strengthening of key indicators would prevail over short-term political factors. Optimism on the economy also appears to outweigh Fed policy changes that have been anticipated by the financial markets."
Managers expressed optimism on several key economic factors:
Investment managers identified a change in Federal Reserve monetary policy or QE tapering as the top risk to equity markets. Long-term interest rates are expected to rise when the Fed tapers its bond purchases under the QE program. However, more than 60 percent believe the U.S. economy will keep growing if the 10-year rate rises by 50 basis points, and 42 percent of managers said long-term rates could rise by 1 percent without stifling economic growth.
At the time the survey was taken, 53 percent of managers expected the impasses in Washington over a continuing resolution to fund the federal government and a measure to authorize an increase in the federal debt ceiling will lead to a modest decline (less than 10 percent of the S&P 500 Index) in the U.S. equity market, while 40 percent expected little to no effect on the market.
"The change in monetary policy was still the number one risk on managers' minds this quarter," said Mark Meisel, Senior Investment Product Specialist of the Multi-Manager Solutions group, who oversees the survey. "Most managers are expecting that Washington will sidestep the budget and debt ceiling issues prior to significant harm being inflicted on the markets."
Looking outside the U.S., managers are seeing value in Emerging Markets equities after losses in those markets in 2013. About two-thirds (64 percent) of managers believe emerging markets equities are undervalued, up from 49 percent in the second quarter. However, managers don't expect strong performance to return soon: Only 23 percent of managers expect emerging market equities to outperform developed market equities over the next 6 months. Managers also view European equities favorably, with more than half (53 percent) saying European equities are undervalued. Most managers (69 percent) believe the Japanese equity market is undervalued or appropriately valued.
On the bullish-bearish spectrum for asset classes and broad economic sectors, managers continue to be most bullish on U.S. large-cap equities, U.S. small caps and emerging market equities:
For more details, please see the full Investment Manager Survey Report on Northern Trust's web site. 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 $36 billion under management as of June 30, 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 Washington, D.C., and 17 international locations in North America, Europe, the Middle East and the Asia-Pacific region. As of June 30, 2013, Northern Trust had assets under custody of US$5.0 trillion, and assets under investment management of US$803.0 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.