Money managers are showing an increased optimism in several important economic measures, according to Northern Trust's quarterly investment manager survey.
Ninety-one percent of respondents expect corporate earnings to increase or stay the same in the next three months, with 47% responding that earnings will increase, up from 32% in the previous quarter. Only 9% had a negative view, compared with 32% in the fourth quarter of 2012.
A survey record was set with 88% expecting housing prices to increase in the next six months. The survey was started in the third quarter of 2008.
Expectations that U.S. job and economic growth will improve in the next six months are rising as well — 38% expect job growth to accelerate, up from 27% in the previous quarter, while 46% said economic growth will accelerate, up from 33%. Only 11% of respondents think GDP growth will slow over the next six months, down from 21% at the end of 2012, and 23% said job growth will decelerate but remain positive.
“We continue to see that managers have a positive view on foundational issues in the U.S. economy — housing, job growth and corporate earnings,” said Christopher Vella, Stamford, Conn.-based chief investment officer of multimanager investments at Northern Trust in an interview. It is in stark contrast to views on Washington, he added, where managers expect sequestration budget cuts to remain in place through the second quarter.
About 56% of respondents said it is likely or very likely the budget cuts will still be in place through June, compared with just 18% that said it is unlikely or very unlikely. Thirty-seven percent said the budget cuts will have a negative impact on the U.S. equity market while 56% said it will have a neutral impact. But 96% of respondents believe the cuts will curtail U.S. economic growth by 1% or less.
Despite that view and the fact that equity markets have been reaching record highs in 2013, more managers still think U.S. equities are undervalued than overvalued. The gap is narrowing, though. Thirty-seven percent said U.S. equities are undervalued compared with 28% who said they are overvalued up to 10%, a significant increase from only 11% last quarter and a high point for the survey. Also, only 11% of managers said U.S. equities are undervalued by 10% or more, the lowest percentage in the survey history.
“Our interpretation is that a lot of the rhetoric and issues over Washington gridlock have been broadly priced into the markets,” Mr. Vella said.
However, 56% of managers said Japanese equities are undervalued and emerging markets, 54%. Managers were fairly split on the valuation of European equities as 38% said equities are fairly valued, 36% undervalued and 26% overvalued.
“I would've expected more differentiation in valuations and opportunities in Japan and emerging markets,” since Japan has less attractive prices following a strong five-month rally, while emerging markets equities are more attractively valued, Mr. Vella said.
The European debt crisis continues to rank as the top risk to equity markets over the next six months, followed by change in U.S. monetary policy, U.S. automatic budget cuts and U.S. corporate earnings. Mr. Vella said the eurozone crisis could have fallen off the list entirely if not for news out of Cyprus.
“Europe, while less likely to fragment over the euro, will experience little growth in 2013,” said Brian Beitner, manager partner at Chautauqua Capital Management LLC, in manager comments in the report. “In the emerging markets, the easy productivity gains are over. The BRICs are experiencing higher unit labor costs, and export demand from the industrialized world is soft. Monetary ease is widespread. Central bankers should shift as output gaps close, failure to do so will be inflationary.”
A change in monetary policy would be a larger risk than other U.S. concerns, Mr. Vella said, because it is less expected and thus, not as priced into the markets. Sixty-four percent of respondents expect interest rates to remain the same over the next three months, but that is down from 80% last quarter, while 35% believe rates will increase. Also, 27% expect inflation to increase.
Even though equity markets have been strong, most managers are not changing the amount of risk in their profiles. Only 12% said they are less risk averse compared with 19% last quarter, while 70% reported no changes in their risk aversion during the quarter. Eighty-six percent of respondents have their cash levels at their historic norm.
“The fact the markets are moving so strongly caused managers to pause … and shy away from putting up more risk,” Mr. Vella said.
U.S. large caps represent the most bullish outlook at 66% of respondents, followed by emerging markets equity, 62%, and U.S. small cap, 59%. More than half are also bullish on developed foreign markets and private real estate. Managers are most bearish on U.S. fixed income and cash, at 80% and 74%, respectively.
On a sector basis, managers are most bullish on industrials at 64%, up from third place last quarter. Information technology is right behind at 63% and is followed by energy, 53%. They are most bearish on utilities and telecom, at 64% and 48%, respectively.
About 100 money managers were surveyed in mid-March.
