January 16, 2014

Investment Managers Optimistic About U.S. Economy and Profit Growth

Majority of managers in survey rate outgoing Fed chief’s performance as good or very good

Investment managers are growing increasingly optimistic, according to a survey conducted Dec. 3 to 18 by Northern Trust.

The survey of some 100 equity and fixed income managers across value and growth styles found that they expected continued growth in the American economy and corporate profits even as the Federal Reserve’s easing program moves ahead.

“On several key indicators, managers were more positive in our fourth-quarter survey than they had been in the third-quarter survey,” Christopher Vella, chief investment officer for multimanager solutions at Northern Trust, said in a statement.

“Most managers expected the Fed would taper QE3 in the first quarter of 2014 and expect interest rates to rise as a result, yet they continue to be bullish on U.S. large-cap equities and have positive expectations on both profit and job growth.”

Respondents saw fundamentals within the economy and corporations as steady to improving. Ninety-five percent of respondents expected job growth to be steady or grow over the next six months, compared with 86% who held that view in the previous survey.

On corporate profits, 64% thought earnings would increase over the next three months, versus 49% with that view in the third quarter survey. Overall, 95% of respondents believed corporate earnings would be stable or increase.

At the same time, 64% of investment managers thought market volatility, as measured by the Chicago Board Options Exchange’s Volatility Index, would increase over the next six months.

Thirty-four percent of managers said they had become more risk-averse in their portfolios in the fourth quarter, compared with 20% in the third quarter. More than half reported no change in risk aversion.

The vast majority said they had maintained a “normal” cash level, in line with the previous quarter.

Most respondents saw attractive valuations in overseas equities. Fifty-seven percent said emerging market equities were undervalued, and 52% believed European equities were undervalued.

This compared with 36% of respondents who viewed U.S. equities as undervalued.

Managers were about evenly split on valuations of the Japanese equity market, with 31% seeing it as undervalued, 36% appropriately valued and 33% overvalued.

Although emerging markets appeared to have the most favorable valuations, they were ranked third on the survey’s “Bull/Bear Indicator,” behind U.S. large cap equities and non-U.S. developed markets as the most bullish asset classes.

“Even though managers expect some headwinds, increasing interest rates and less favorable relative valuations, they continue to be most bullish on U.S. equities,” Mark Meisel, senior investment product specialist of the multi-manager solutions group who oversaw the survey, said in the statement.

“In the fourth quarter, U.S. equity indexes reached all-time highs, yet 97% of managers said they did not think the U.S. equity market had formed a bubble.”

As part of the survey, Northern Trust asked managers to rate Ben Bernanke’s performance as he prepared to step down as Fed chairman at the end of February.

Seventy-eight percent of managers believed Bernanke’s leadership of the Fed during his tenure had been either good or very good. Approximately 18% thought his leadership had been average.

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Check out Gundlach Looks to ‘Giddily Despised’ Investments in 2014 on ThinkAdvisor.

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