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Investment managers eyeing Fed as No. 1 risk

Federal Reserve Building
Federal Reserve Building

A possible change in the U.S. Federal Reserve monetary policy displaced the European debt crisis as the greatest risk to equity markets over the next six months, according to Northern Trust's quarterly investment manager survey.

Respondents also believe the Fed's recent comments on slowing bond purchases will result in higher interest rates, as 62% of respondents said rates will rise in the next three months. About 63% expect the Chicago Board Options Exchange Market Volatility index, or VIX, to increase over the next six months, up from 49% in the first quarter.

Money managers' rising optimism in key U.S. economic measures was tempered somewhat last quarter, but still largely remained positive. Seventy-six percent expect housing prices to rise in the next six months, down from 88% in the first-quarter survey. Fifty-seven percent expect stable job growth, while 29% said they expect accelerated job growth, shifting from 39% and 38%, respectively, in the previous quarter. Corporate earnings forecasts still remain strong with 87% expecting profits to grow or remain the same, down slightly from 91%.

Views on equity markets actually improved in the last quarter. Seventy-seven percent of managers said the U.S. equity market is undervalued or appropriately valued, up from 73% in the first quarter. U.S. large caps and small caps also topped the asset class rankings in the “Bull/Bear Indicator.”

Outside the U.S., 59% said European equities are undervalued, up from 36% in the previous quarter, and 21% view European equities as undervalued by more than 10%, the highest for any region. Only 9% said it is overvalued, down from 26%. Managers were split on emerging markets against developed international markets with 51% saying emerging markets equity will outperform in the second half of 2013.

About 100 institutional money managers were surveyed in mid-June.