Institutional investment managers have dialed back their expectations for global growth due to concerns that the sovereign debt of Portugal, Italy, Ireland, Greece and Spain (recently referred to as PIIGS) will become a drag on the world economy, according to a survey.
Northern Trust Global Advisors’ (NTGA) poll of approximately 90 institutional managers finds that more than two-thirds of respondents expect that sovereign debt concerns regarding PIIGS will weigh on global markets for the next six months or longer. As a result, 21% of managers have reduced exposure to these countries, while the majority of managers (57%) have avoided these countries altogether.
“This quarter, our managers revealed to us their concern that the issues relating to the eurozone countries may be a longer-term problem,” says Kelly Swiatek, NTGA investment analyst. “This issue is likely weighing on their views of global economic growth.”
And, in a significant shift from the prior four quarters, a majority of managers no longer expect global growth to accelerate over the next six months. Three-quarters of respondents surveyed in the second quarter anticipate that global growth will remain the same or decelerate, while 25% still expect growth to accelerate. Accordingly, institutional managers are less concerned about the prospect of inflation or rising interest rates.
There is optimism among managers regarding market valuations, as for the first time since the second quarter of 2009 the majority of managers (62%) believe that the U.S. equity market (as measured by the S&P 500 Index) is undervalued. Certain areas of international markets are also seen to be attractive, with 40% of managers saying emerging market equities are undervalued.
“Our second-quarter survey revealed less optimistic growth expectations from our managers,” says Chris Vella, global director of research for NTGA. “In an environment where growth is less broad based, employing managers that are strong stock pickers can be even more valuable.”