The possibility of a change in U.S. Federal Reserve monetary policy or its “quantitative easing” stimulus program poses the greatest risk to equity markets over the next six months, according to a quarterly survey of investment managers by Northern Trust. The survey of approximately 100 investment managers was taken June 6-21, as the financial markets were reacting to comments by Federal Reserve Chairman Ben Bernanke and others regarding the future of Fed policy. A majority of respondents, 62 percent, said comments indicating the Fed would slow the pace of its bond purchases under the quantitative easing or QE program would lead to higher interest rates in the next three months. A change in Fed policy also displaced a European debt crisis as the greatest potential risk to equity markets in the next six months, according to a ranking by managers in the survey. After two quarters of rising optimism on the U.S. economy, the survey found tempered enthusiasm on housing prices and jobs, although managers still hold positive views on the U.S. economy and stock market. For example, 76 percent of managers expect housing prices to rise in the next six months, but that figure is down from 88 percent in the first quarter survey. Meanwhile, 22 percent of respondents expect housing prices to remain stable, up from only 9 percent who held that view in the previous quarter. On jobs, too, there was a shift in expectations from accelerating improvement to stable, slower growth. More than half (57 percent) of respondents expect stable job growth in the next six months, while those expecting accelerating job growth fell to 29 percent from 38 percent in the first quarter survey. However, the vast majority of managers, 87 percent, expect U.S. corporate profit growth to increase or remain the same in the next three month, down only slightly from the previous survey.
“Monetary policy announcements in the U.S. have led to increased volatility in equity markets,” said Chris Vella, Chief Investment Officer for Northern Trust Multi-Manager Solutions. “Despite this volatility, most of our managers have a positive view on key economic indicators in the U.S., which may be why they continue to have supportive views on the U.S. equity market’s current valuation.”Fully 77 percent of managers surveyed believe the U.S. equity market, as measured by the S&P 500 Index, is undervalued or appropriately valued, a small change from 73 percent with that view in the first quarter. U.S. Large Cap Equity and U.S. Small Cap Equity also topped the asset class rankings in the survey’s “Bull/Bear Indicator.” Looking outside the U.S., managers were evenly split, 51-49 percent, on whether emerging market equities will outperform equities in developed markets like Europe and Japan during the second half of 2013. Emerging market equities are lagging developed markets year to date, while Japanese equity markets have moved dramatically since the accommodative monetary and economic policies initiated by Japanese Prime Minister Shinzo Abe. Nearly half (48 percent) of managers believe ‘Abe-nomics’ will benefit the Japanese economy, while 36 percent are uncertain. Perhaps due to strong performance in Japanese equities earlier this year, 33 percent of managers view this market as overvalued, up from 17 percent in the first quarter. Investment managers were positive toward European equity valuations: 59 percent believe European equities are undervalued, up from 36 percent in the previous quarter. Only 9 percent of managers view the region's equities as overvalued, down from 26 percent in the first quarter. “The valuation assessments of the various equity regions by investment managers reflected a fair amount of changes from the previous quarter,” said Mark Meisel, Senior Investment Product Specialist of the Multi-Manager Solutions group, who oversees the survey. “This was probably due to the volatile and varied performance among the regions, with the U.S. equity market up just under 14 percent through June, emerging market equities down nearly 10 percent, European equities flat and Japanese equities up over 15 percent on a U.S. dollar basis.”
Other insights from the survey include:
- Perhaps reflecting concerns over monetary policy gear-shifting, most investment managers (63%) believe market volatility as measured by the Chicago Board Options Exchange’s Volatility Index (VIX) will increase over the next six months. This is up from 49% in the first quarter.
- 21% view European equities as undervalued by more than 10%, the highest percentage in this category for any region.
- 20% view emerging market equities as undervalued by more than 10%.
- 63% are bullish U.S. large caps.
- 59% are bullish U.S. small caps, in line with last quarter.
- More than half (53%) are bullish on MSCI EAFE.
- 53% are bullish on emerging market equities, down from 62% last quarter