Survey

Investment managers positive on US growth, but inflation risk looms, says Northern Trust survey

Investment manager confidence in US economic growth reached a five-year high in Northern Trust’s quarterly survey, but expectations for inflation were up as well.

The survey also found concern about geopolitical risk, with seven out of 10 respondents saying the Russia-Ukraine conflict could have a negative impact on equity markets.
 
Investment managers were divided on the impact of high-frequency trading on equity market participants, and on the outlook for higher-yielding investments that have attracted cash flows and higher valuations in the extended low interest rate environment.
 
Following a slow first quarter, 68 per cent of managers – the largest percentage since 2009 – expect US economic growth to accelerate over the next six months. Fully 96 per cent expect US growth will either remain steady or accelerate in that period, and respondents were optimistic on a number of related indicators:
 
•             65 per cent expect corporate profits will increase over the next three months.
•             61 per cent believe job growth will remain stable over the next six months.
•             57 per cent expect that housing prices will increase up to 10 per cent over the next six months.
 
“At the mid-point of 2014, investment managers appear to be very confident in the strength of the US economy, despite the negative growth that started the year,” says Christopher Vella, chief investment officer for multi-manager solutions at Northern Trust. “But there are a couple of items that bear watching. Geopolitical risk is the top concern for managers, and expectations for US inflation are the highest in three years.”
 
The survey found 51 per cent of managers expect inflation will rise over the next six months – up from 33 per cent who held that view in the first quarter, and the highest percentage since 2011.
 
Globally, investment managers are focused on geopolitical risk, ranking it as the top risk facing equity markets. Although markets have largely recovered since Russia’s takeover of Crimea, 61 per cent of investment managers believe there is a fair chance that the conflict will lead to further declines in markets, and another 9 per cent think it is very likely to have an adverse impact.
 
At the same time, 63 per cent of respondents believe that emerging market equities are undervalued, following a slowdown in those markets, and 83 per cent of managers that can invest in companies tied to emerging markets are still seeking companies with exposure to those markets.
 
Japanese equities are seen as undervalued by 41 per cent of respondents, up from 32 per cent in the first quarter. Nearly seven in 10 managers (69 per cent) believe the negative impact of an April sales tax increase in Japan has already been priced into equity markets there.
 
Regionally, 57 per cent of managers expect Asia-Pacific equity markets (as represented by the MSCI AC Asia Pacific Index) will perform in-line with global equities markets (MSCI All Country World Index), up from 39 per cent in the first quarter. Only 15 per cent of managers expect Asia-Pacific equities to underperform global equities over the next six months, down from 41 per cent in the previous quarter.
 
Only 27 per cent of managers believe that US equities are undervalued – the smallest percentage since the survey began in the second half of 2008 – while 33 per cent view the US market as overvalued and 40 per cent as appropriately valued. Despite this valuation perspective, 56 per cent of managers are bullish on US large-cap equities, making it the strongest asset class in the survey’s bull/bear indicator.
 
“Investment managers are still most bullish on US equities, despite less favourable valuations,” says Mark Meisel, senior investment product specialist, multi-manager solutions, who oversees the survey. “This is not too surprising, given the strong US equity markets, low interest rates and expectations for improving fundamentals.”
 
On a topical question, investment managers had mixed views on the impact of high-frequency trading on equity markets, with 43 per cent seeing a negative impact for market participants, nine per cent a positive impact and 48 per cent saying the practice is neutral in its impact.
 
Managers were evenly split on the outlook for higher-yielding investments (dividend stocks, high-yield bonds, etc.) that have attracted large cash flows and higher valuations from investors. While 50 per cent believe that valuations are too stretched for these investments to continue rising, the other half said the market would continue to reward high-yield investments over the next six months.
 
On the bullish-bearish spectrum for broad economic sectors, managers continue to be most bullish on information technology, industrials and energy:
 
•             Fully 13 per cent of managers are very bullish, and 56 per cent of managers are bullish on the information technology sector.
•             Industrials had 63 per cent per cent of managers with a bullish view.
•             Utilities and telecom services were in the bottom two most-bearish positions.

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