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Investment managers expect Fed rate hike and increased market volatility

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Investment managers anticipate a rise in market volatility as the US presidential election approaches, and many expect to modify their portfolios based on the election results, according to a quarterly survey by Northern Trust Asset Management.

In the survey of approximately 100 investment firms, taken 2-16 September, managers view the US economy and corporate earnings as stable and expect the Federal Reserve to increase rates prior to the end of this calendar year.
 
“Managers highlighted two concerns in this quarter’s survey: Fed policy and the US elections,” says Christopher Vella, chief investment officer for multi-manager solutions at Northern Trust Asset Management. “Despite those concerns, most managers expect US economic growth and corporate earnings to remain steady.”
 
On the economy, 63 per cent of managers expect US gross domestic product (GDP) growth to remain the same over the next six months, up from 49 per cent with that view in the prior quarter. Those who expect accelerating growth fell to 29 per cent, from 42 per cent previously. A larger portion of investment managers expect corporate earnings to remain the same over the next three months – 50 per cent, up from 44 per cent in the previous quarter.
 
Nearly half the managers (49 per cent) expect housing prices to remain stable, up from 43 per cent last quarter, and 48 per cent expect housing prices to increase. Most managers surveyed (53 per cent) expect inflation will remain the same over the next six months, up from 40 per cent with that view the prior quarter. A majority (53 per cent) expect interest rates to rise in the next three months, up from 33 per cent previously.
 
The vast majority, 87 per cent of managers, correctly predicted that the Federal Open Market Committee would not raise rates at its September meeting. Yet 71 per cent expect a Fed rate increase prior to the end of the calendar year. Managers ranked a change in US monetary policy as the top risk to global equity markets, with a rise in interest rates ranked second, US corporate earnings third and the US presidential election fourth.
 
Expectations of market volatility are at near-record levels, with 78 per cent of managers predicting an increase in volatility over the next six months. This was the second highest reading since Northern Trust’s first survey of investment managers, in the third quarter of 2008. On a related topical question, 89 per cent of investment managers expect the approach of the US elections on 8 November to generate an increase in market volatility.
 
Asked to predict which of three US election outcomes would have the biggest impact on global equity markets, 72 per cent of managers said a victory by Republican presidential candidate Donald Trump would have the most impact, while 27 per cent cited the Democrats winning a majority of seats in the US House of Representatives, and only 1.4 per cent cited Hillary Clinton’s election as president.
 
While 54 per cent of managers do not expect to change their portfolios based on the election outcome, nearly one in four (24 percent) expect to change some specific security positions, another 15 per cent may have to make sector or geographic allocation changes, and 8 per cent may change the risk aversion in their portfolios.
 
US equities viewed as overvalued by 48 per cent of managers, an all-time high, while those who see US equities as undervalued dropped to a historic low of 13 percent. European equities are seen as overvalued by 21 per cent of managers, up from 13 per cent in the previous quarter. Only 10 per cent of managers believe emerging market equities are overvalued, down from 18 per cent in the prior quarter.
 
A relatively large portion of managers, 23 percent, are holding cash levels above their historic norms. This ties the highest reading in previous surveys. In another sign of defensiveness, only 6 per cent of managers have become less risk averse over the past three months – an all-time low for the survey. At the same time, 23 per cent of managers increased commodities exposure in the second quarter, a relatively high percentage. Nine per cent reduced allocation to commodities, an all-time low.
 
“Although managers are concerned about valuations they are still investing where they see opportunities,” says Mark Meisel, senior investment product manager for multi-manager solutions at Northern Trust Asset Management. “As the commodity markets seemed to have bottomed, a number of managers have increased their allocations to commodities.”
 
On the survey’s Bull-Bear Indicator, managers are most bullish on emerging market equities and US small cap and the information technology and healthcare sectors. Investment managers are most bearish on US fixed income, followed by non-US bonds and the utility and telecommunication services sectors.

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