Investment managers expect continued growth in the U.S. economy and corporate profits even as the Federal Reserve reduces its bond buying under the quantitative easing program (QE3), according to a quarterly survey conducted by Northern Trust. The survey of approximately 100 managers, taken December 3-18, also found that 69 percent 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,” said 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 U.S. 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 percent of respondents expect job growth to be steady or increasing over the next six months, compared to 86 percent who held that view in the previous survey. On corporate profits, 64 percent of managers expect earnings to increase over the next three months, versus 49 percent with that view in the third quarter survey. Overall, 95 percent of respondents believe corporate earnings will be stable or increase.
Along with these positive views, 64 percent 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 percent of managers became more risk-averse in their portfolios in the fourth quarter, compared to 20 percent in the third quarter. More than half report no change in risk aversion. The vast majority, 82 percent of managers, have maintained a “normal” cash level, in line with the previous quarter.