Almost half (47%) of money managers polled believe the market to be undervalued, according to a survey.
Russell Investments’ latest Investment Manager Outlook survey finds that the number of managers who believe the market to be undervalued has risen 19 percentage points since a similar survey in March, while only 9% of managers believe the market to be overvalued.
The survey of 150 U.S. investment managers also reveals that while managers see opportunity in the market’s current valuation levels, they are also on heightened alert for the downside of risk.
“Managers appear to be holding a ‘risk on, risk off’ switch and swing between loving risk and hating it, changing preferences quickly,” says Mark Eibel, director of client investment strategies with Russell Investments. “Managers believe the market is undervalued but want to see consistently strong earnings and improved employment before committing to ‘risk on’ again.”
Almost three-quarters (73%) of managers named Europe’s economic troubles as an issue posing a significant risk to the performance of U.S. stocks over the next 12 months. As a result, bullishness for non-U.S. (developed market) equities fell 11 percentage points from the previous survey to 34%. More than half of respondents also pointed to industry regulations (53%) and unemployment (52%) as primary concerns for U.S. equity performance.
“After the market cataclysms of 2008, the economic turmoil in Europe has become the first big aftershock,” says Eibel. “Fifteen months ago, managers believed that the markets had withstood a global financial crisis and that they were looking through their rear-view mirror at a profoundly significant risk event. Now, after a strong run-up in performance, the concern is the risk that may be ahead on the horizon.”
Additional findings
Preferences betray risk sensitivity
Bullishness for cash rose 10 percentage points from the March 2010 all-time survey low to 16%, and U.S. Treasuries also saw a six percentage-point increase from the last survey to 12%. Sectors such as consumer staples and utilities saw increases in bullishness as well, rising five percentage points and nine percentage points, respectively, from the last survey.
High on tech
Technology continues to be the most-favoured sector, although bullishness for the sector slipped 10 percentage points from March 2010 to 69%. Bullishness for the materials and processing sector also saw a sizable drop in bullishness of nine percentage points from the last survey to 40%.
“Coming out of the recession, technology has been a popular sector because many managers were expecting an increase in information technology spending in the United States and across the globe. The sector includes many companies with strong balance sheets and a global customer base, both of which managers find appealing,” says Eibel. “The global economy, however, might be growing slower than many first thought, and when the managers’ sensitivity to risk is heightened, they look to stocks that have performed well over the last year, such as technology, to sell.