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, took place between September 4 and September 18.
“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:
- 86% believe job growth will either remain stable or accelerate over the next 6 months
- 71% expect housing prices to rise over the next 6 months
- 89% expect corporate profits to remain stable or increase in the fourth quarter
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.
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:
- 62% of managers are bullish on U.S. large caps.
- For small-caps, 53% of managers are bullish, down from 59% in the second quarter.
- 51% are bullish on emerging market equities versus 53% in the second quarter.
- Managers were most bullish on information technology, industrials and health care.
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.