Investment managers see a change in U.S. monetary policy as the top risk to equities, and also have concerns about U.S. corporate profits and a preference for non-U.S. equities, finds a Northern Trust Asset Management quarterly survey.
In the first quarter, managers placed monetary policy first on a list of risks to equities over the next six months, replacing geopolitical risk, which had topped the list for the past year. The change came as the Federal Reserve indicated it is closer to raising the base U.S. interest rate and removing some of the monetary stimulus that has supported financial markets over the last several years.
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Investment manager views on U.S. corporate profits also shifted, with 35% expecting a decrease in earnings, up from 5% the previous quarter. Managers saw the most opportunity in non-U.S. equity markets: 88% said European markets are fairly or undervalued, compared to 82% who placed emerging market equities in those valuation categories and just 62% who viewed U.S. equities as appropriately valued or undervalued.
“More managers expect U.S. economic growth to be stable rather than accelerating in this quarter’s survey, while U.S. equity valuations are a little less attractive and volatility is expected to rise,” says Christopher Vella, chief investment officer for multi-manager solutions at Northern Trust. “For the first time in several quarters, managers are more bullish on non-U.S. developed market equities and U.S. small cap stocks than they are on U.S. large cap equities.”
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As the U.S. dollar appreciates against the yen and euro, 72% of managers believe that the economies of both Japan and the eurozone will benefit. Nearly three quarters (74%) of managers see little or modest probability of a eurozone crisis resulting from Greece’s debt negotiations and rising anti-euro sentiment in some countries.
Meanwhile, expectations for the U.S. economy moderated from previous quarters, with more managers saying GDP growth, housing prices and job growth will remain stable rather than accelerate over the next three or six months.
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Expectations for market volatility were also lower: 69% of managers said volatility, as measured by the Chicago Board of Options Exchange Volatility Index (VIX), will increase over the next six months, down from a historic high of nearly 80% of managers with that view in the fourth quarter.