After two quarters of declining sentiment about the US economy, investment managers had more positive views on the US economic outlook in the most recent quarterly survey by Northern Trust Asset Management.
At the same time, managers expressed doubt that negative interest rate policies introduced by central banks in Europe and Japan would help spur economic growth outside the US
The survey of 100 investment firms also gauged views on the valuation of equity markets following the global market sell-off in January and February, the direction of oil prices and the likelihood of “Brexit” – a British exit from the European Union – in an upcoming UK referendum.
“The outlook on US economic growth and corporate profits improved in the first quarter of 2016, despite the extreme market volatility that started the year,” says Christopher Vella, Chief Investment Officer for Multi-Manager Solutions at Northern Trust. “While managers are still cautious on the outlook for US corporate profits and most economic indicators, we are seeing a change from the trend of declining expectations in the second half of 2015.”
The survey, taken 3-18 March, found that 37 per cent of managers expect US gross domestic product (GDP) to accelerate in the next six months, up from 23 per cent with that view in the fourth quarter. Another 57 per cent expect US GDP growth to remain stable, and just 6 per cent expect GDP growth to slow, down from 13 per cent who expected slower growth in the previous quarter.
US corporate profit expectations were also up, with 34 per cent expecting an increase in earnings, up from 23 per cent in the prior survey. A larger share of managers expect housing prices to increase over the next six months: 60 per cent versus 49 per cent in the fourth quarter of 2015. More than half the managers (54 percent) expect inflation to increase over the next six months, well above the long-term average of 35 per cent for the question.
Following the recent market declines, 83 per cent of managers believe global equity markets are either undervalued or fairly valued, while 17 per cent still view global equities as overvalued. Managers were most bullish on emerging market (EM) equities and 59 percent, the highest reading since the third quarter 2014, view them as undervalued. Approximately 77 per cent of managers view credit markets as fairly valued or undervalued.
As the European Central Bank and Bank of Japan introduce negative interest rates as a monetary policy tool, about one-third of managers believe that negative rates will be helpful in spurring additional economic activity policies in those regions, while 23 per cent expect it will reduce economic growth in these regions, and 43 per cent predict little to no impact on growth. A majority, 55 percent, believe negative interest rate policies overseas will keep 2- to 10-year US Treasury note rates very low.
Managers were also asked where they expect oil prices will trade in the next nine to 12 months, after West Texas Intermediate Crude dropped to less than USD30 per barrel from more than USD100 during the past 19 months. Only 2 per cent of managers expect oil will trade below USD30 again in that period, and 94 per cent expect the price will be between USD30 and USD60.
Regarding the 23 June referendum in the United Kingdom, 82 per cent of managers believe that UK voters will choose to stay in the EU. However, should voters opt to leave, 61 per cent of managers believe it would hurt the British economy, while 35 per cent expect a Brexit would have little to no impact on the UK economy.
Despite their bullish view on Emerging Markets (EM) equities, managers ranked EM economic growth as the top risk facing equity markets for the third quarter in a row, followed by US corporate earnings and changes to US monetary policy. Oil prices ranked fifth and the US Presidential primaries and election ranked eighth out of 10 on the list of risks.
After increased volatility in a number of markets, a higher percentage of managers – 22 per cent versus 10 per cent in the previous quarter – expect the Chicago Board Options Exchange Volatility Index (VIX) to decline over the next six months. A higher percentage, 21 percent, have above-normal cash levels currently in their portfolios, compared to the long-term average of 12 percent, suggesting a slightly defensive stance.
“Volatility in the markets during the first quarter created opportunities for some managers,” says Mark Meisel, Senior Investment Product Manager for Multi-Manager Solutions at Northern Trust. “Continuing an upward trend, 22 per cent of managers increased their commodities exposure, up from only 7 per cent in the fourth quarter of 2014. Managers are seeing improved valuations in a number of markets.”
On the bull-bear indicator, information technology remained the top-ranked sector, and consumer discretionary moved up to second from third rank in the previous quarter. Among asset classes, non-US developed markets, US small cap equity and US large cap equity followed EM equities as the highest rated, with US bonds, cash, and emerging-market debt (hard currency) at the bottom of the ratings.