Investment managers expect continued growth in the US economy and corporate profits even as the Federal Reserve reduces its bond buying under QE3, according to a quarterly survey conducted by Northern Trust.
The survey of approximately 100 managers, taken December 3-18, also found that 69 per cent expect interest rates will rise when the Fed begins its QE3 tapering.
“Optimism continues to rise among investment managers. On several key indicators, managers were more positive in our fourth quarter survey than they had been in the third quarter survey,” says Christopher Vella, chief investment officer for multi-manager solutions at Northern Trust. “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 US large-cap equities and have positive expectations on both profit and job growth.”
Fundamentals within the economy and corporations are seen by managers as steady to improving. For example, 95 per cent of respondents expect job growth to be steady or increasing over the next six months, compared to 86 per cent who held that view in the previous survey. On corporate profits, 64 per cent of managers expect earnings to increase over the next three months, versus 49 per cent with that view in the third quarter survey. Overall, 95 per cent of respondents believe corporate earnings will be stable or increase.
Along with these positive views, 64 per cent of investment managers believe market volatility as measured by the Chicago Board Options Exchange’s Volatility Index (VIX) will increase over the next six months. Also, 34 per cent of managers became more risk-averse in their portfolios in the fourth quarter, compared to 20 per cent in the third quarter. More than half report no change in risk aversion. The vast majority, 82 per cent of managers, have maintained a “normal” cash level, in line with the previous quarter.
Most managers see attractive valuations in emerging market and European equities: 57 per cent say emerging market equities are undervalued and 52 per cent believe European equities are undervalued. This compares with 36 per cent of respondents who view US equities as undervalued. Managers are almost evenly split on valuations of the Japanese equity market, with 31 per cent seeing it undervalued, 36 per cent appropriately valued and 33 per cent overvalued. While emerging markets seem to have the most favourable valuations, they are ranked third on the survey’s “Bull/Bear Indicator,” behind US large cap equities and non-US developed markets as the most bullish asset classes.
“Even though managers expect some headwinds, increasing interest rates and less favourable relative valuations, they continue to be most bullish on US equities,” says Mark Meisel, senior investment product specialist of the multi-manager solutions group, who oversees the survey. “In the fourth quarter, US equity indexes reached all-time highs, yet 97 per cent of managers said they did not think the US equity market had formed a bubble.”
With Ben Bernanke scheduled to step down as Federal Reserve chairman at the end of January, managers were asked to rate his performance. Bernanke chaired the Fed starting in January 2006 and led it during some of the most tumultuous times in the financial markets and global economy. Slightly more than 78 per cent of managers believe Bernanke’s leadership of the Fed during this period was either good or very good. Approximately 18 per cent of managers thought his leadership was average.