Investment managers aren't so bullish on emerging markets as they were last quarter, according to Russell Investments' quarterly Investment Manager Outlook. Russell found that over half of managers surveyed in early March are still bullish on emerging market equities, but after falling from nearly three-quarters of managers, they are more bearish on the asset class than they've been since March 2009.
"That was the biggest finding for this quarter," Rachel Carroll, client portfolio manager at Russell Investments, told AdvisorOne. "Unrest in the Middle East combined with inflation in emerging markets, particularly food inflation" has managers concerned, although Carroll noted that emerging markets are up 23% year-over-year. "Managers are seeing this as a good time to take the profits and move away from uncertainty."
Managers are more bearish on emerging markets, but they're optimistic about U.S. equities, especially large-cap growth. Mid-cap growth and large-cap value were other big asset classes for managers, while Treasuries and cash were at the bottom of managers' expectations. The report noted that while REITs have historically been unpopular among managers, the past two quarters have seen an increase in bullishness.
Managers also have interest rates on their minds. Of those who expressed concern, nearly one-third are increasing their exposure to equities, while 29% are moving out of Treasuries. Many managers are responding to interest rate concerns by shortening the duration of their fixed income portfolios.
Managers expressed confidence in the market overall. The percentage of managers who believe the market is fairly valued is at an all-time high for the report, and the percentage who feel the market is overvalued is at an all-time low.
What are managers bullish on?
Technology. The report noted managers have consistently favored that sector, based on strong balance sheets and consumer demand. Managers' top tech sectors are software, communications and semi-conductors. Demand for products like smartphones and tablets will influence business technology spending.
Energy is another big winner for managers, and bullishness is up 22 percentage points from one year ago. It's important to note that the survey was conducted prior to the earthquake and tsunami in Japan. Russell pointed to potential opportunities in natural gas and coal companies, though, if a global shift away from nuclear power occurs.
Carroll described how the events in Japan could play out for managers.
"It could have a couple of impacts. There could be a slight drop in bullishness on non-U.S. equities, but we don't expect that would be a huge shift," she predicted. "We probably will see more interest in producer durables. Those companies are stepping in to clear the results of the tsunami. We could see some interest in materials and processing, because eventually there will be rebuilding in Japan."
Carroll pointed to the increase in bullishness on the financial services sector, which increased 10 percentage points in the March survey to almost half of managers.
"I was interested to see the increase in bullishness in financial services sector," she said. "Managers backed away after the global financial crisis, but they're gaining confidence again. This is a great time to get in on stocks that have been undervalued recently."