If the United States Federal Reserve implements a quantitative easing stimulus program, this would pose the biggest threat to the stock market over the next six months, according to a Northern Trust survey.
The quarterly study polled about 100 mostly U.S. investment managers in June, when the markets were reacting to Federal Reserve Chairman Ben Bernanke’s statements about the future of the Fed’s policy.
Sixty-two percent of respondents say comments that signal that the Fed would slow its bond purchases under the stimulus program would cause interest rates to rise in the next three months. The survey finds that money managers see a change in monitory policy as a bigger risk to markets in the next six months than the European debt crisis, which was previously considered the greatest threat.
The study also shows declining optimism about U.S. housing prices. Seventy-six percent of managers expect an increase in housing prices over the next six months, down from 88% in the first quarter survey. Twenty-two percent of participants expect housing prices to remain stable; in the previous quarter, only 9% anticipated that.
When it comes to employment, the survey once again reveals a move away from strong growth expectations. Fifty-seven percent of portfolio managers expect job creation to be stable in the next six months. Only 29% foresee robust job growth, down from 38% in the first quarter survey.
Despite all that, most respondents (87%) anticipate that U.S. corporate profits will either grow or remain the same in the next three months, down only slightly from the previous quarter.
“Monetary policy announcements in the U.S. have led to increased volatility in equity markets,” says 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.”
The overwhelming majority of respondents (77%) believe that the U.S. stock market, as measured by the S&P 500 Index, is undervalued or appropriately valued. In the first quarter, the sentiment was about the same.
According to the survey’s Bull/Bear Indicator, U.S. Large Cap Equity and U.S. Small Cap Equity topped the asset class rankings.
When it comes to international markets, survey participants are almost evenly split on whether during the second half of 2013 emerging equities will perform better than developed market equities.
So far this year, emerging market stocks have been lagging developed markets. But Japanese markets have moved up as a result of monetary and economic policies intended to encourage private investment.
Forty-eight percent of polled managers believe that Japan’s fiscal and monetary government policies will help the country’s economy, while 36% are uncertain.
A third of respondents view the Japanese market as overvalued, perhaps because of the country’s strong equity performance earlier this year. This figure is up from 17% in the first quarter.
When it comes to European equity valuations, 59% of money managers think European equities are undervalued, up from 36% in the previous quarter. European equities are overvalued only in the eyes of 9% of respondents, down from 26% in the first quarter.
“The valuation assessments of the various equity regions by investment managers reflected a fair number of changes from the previous quarter,” says 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% through June, emerging market equities down nearly 10%, European equities flat and Japanese equities up over 15% on a U.S. dollar basis,” Meisel explains.
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