Money managers remain positive despite market risks

Investment managers expect further growth in the U.S. economy and do not expect that problems in emerging markets will spread to developed markets, according to a quarterly survey conducted by Northern Trust.

Only 11% of managers believe that financial market volatility and a slowing rate of economic growth in emerging markets create a significant risk of contagion for developed markets. Eighty-nine percent said there is only a small to modest probability (under 25%) that emerging markets challenges will spread to developed markets.

Also, 79% of investment managers believe that the weak U.S. economic data reported in recent months is temporary and expect stronger numbers to return in the second quarter of 2014.

“Managers are wary, but still optimistic, with a positive view of U.S. economic fundamentals,” says Christopher Vella, chief investment officer for multi-manager solutions at Northern Trust. “Managers expect U.S. GDP, corporate profits, housing prices and jobs to continue to improve, and that confidence appears to outweigh their concerns about geopolitical risks like the Ukraine-Russia conflict and the slowdown in emerging markets’ economic growth.”

As in the previous quarter, managers are positive regarding U.S. economic fundamentals: over the next six months, 89% believe job growth will remain stable or accelerate, and 97% expect steady or accelerating U.S. GDP growth, while 95% of respondents believe corporate earnings will increase or remain stable over the next three months.

But fewer managers than last quarter anticipate an increase in interest rates: 48% expect rates to rise over the next three months, versus 66% in the fourth quarter. Most managers, 67%, expect inflation to remain the same, while 33% expect a rise in inflation over the next six months.

The vast majority of managers—90%—are in line with their historical cash positions. A sizable minority of managers, 27%, were more risk-averse in the first quarter than previously, while 63% reported no change in their risk aversion compared to three months ago. About 70% of investment managers believe market volatility will increase over the next six months, a slight increase from 64% in the fourth quarter.

Emerging market equities are viewed as having the best valuations by managers: 64% believe emerging market equities are undervalued, up from 57% in the fourth quarter.

European equities are seen as undervalued by 54% of investment managers. This compares with 30% of the managers who view U.S. equities as undervalued, while 42% see U.S. equities as appropriately valued. Even though emerging markets seem to have the most favourable valuations, they are ranked fourth in terms of bullishness, behind U.S. large cap equities, non-U.S. developed markets and U.S. small cap equities.

Approximately 100 managers took part in the survey.

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