Northern Trust Survey: Investment Managers Positive on U.S. Growth, but Inflation Risk Looms

CHICAGO--(BUSINESS WIRE)--

Investment manager confidence in U.S. economic growth reached a five-year high in Northern Trust's quarterly survey, but expectations for inflation were up as well. The survey also found concern about geopolitical risk, with seven out of 10 respondents saying the Russia-Ukraine conflict could have a negative impact on equity markets.

The survey, taken June 4-13, also found investment managers divided on the impact of high-frequency trading on equity market participants, and on the outlook for higher-yielding investments that have attracted cash flows and higher valuations in the extended low interest rate environment.

Following a slow first quarter, 68 percent of managers – the largest percentage since 2009 – expect U.S. economic growth to accelerate over the next six months. Fully 96 percent expect U.S. growth will either remain steady or accelerate in that period, and respondents were optimistic on a number of related indicators:

• 65% expect corporate profits will increase over the next three months.
• 61% believe job growth will remain stable over the next six months.
• 57% expect that housing prices will increase up to 10% over the next six months.

“At the mid-point of 2014, investment managers appear to be very confident in the strength of the U.S. economy, despite the negative growth that started the year,” said Christopher Vella, Chief Investment Officer for Multi-Manager Solutions at Northern Trust. “But there are a couple of items that bear watching. Geopolitical risk is the top concern for managers, and expectations for U.S. inflation are the highest in three years.”

The survey found 51 percent of managers expect inflation will rise over the next six months – up from 33 percent who held that view in the first quarter, and the highest percentage since 2011.

Globally, investment managers are focused on geopolitical risk, ranking it as the top risk facing equity markets. Although markets have largely recovered since Russia's takeover of Crimea, 61 percent of investment managers believe there is a fair chance that the conflict will lead to further declines in markets, and another 9 percent think it is very likely to have an adverse impact.

At the same time, 63 percent of respondents believe that emerging market equities are undervalued, following a slowdown in those markets, and 83 percent of managers that can invest in companies tied to emerging markets are still seeking companies with exposure to those markets.

Japanese equities are seen as undervalued by 41 percent of respondents, up from 32 percent in the first quarter. Nearly seven in 10 managers (69 percent) believe the negative impact of an April sales tax increase in Japan has already been priced into equity markets there.

Regionally, 57 percent of managers expect Asia-Pacific equity markets (as represented by the MSCI AC Asia Pacific Index) will perform in-line with global equities markets (MSCI All Country World Index), up from 39 percent in the first quarter. Only 15 percent of managers expect Asia-Pacific equities to underperform global equities over the next six months, down from 41 percent in the previous quarter.

Only 27 percent of managers believe that U.S. equities are undervalued – the smallest percentage since the survey began in the second half of 2008 – while 33 percent view the U.S. market as overvalued and 40 percent as appropriately valued. Despite this valuation perspective, 56 percent of managers are bullish on U.S. large-cap equities, making it the strongest asset class in the survey's bull/bear indicator.

“Investment managers are still most bullish on U.S. equities, despite less favorable valuations,” said Mark Meisel, Senior Investment Product Specialist, Multi-Manager Solutions, who oversees the survey. “This is not too surprising, given the strong U.S. equity markets, low interest rates and expectations for improving fundamentals.”

On a topical question, investment managers had mixed views on the impact of high-frequency trading on equity markets, with 43 percent seeing a negative impact for market participants, 9 percent a positive impact and 48 percent saying the practice is neutral in its impact.

Managers were evenly split on the outlook for higher-yielding investments (dividend stocks, high-yield bonds, etc.) that have attracted large cash flows and higher valuations from investors. While 50 percent believe that valuations are too stretched for these investments to continue rising, the other half said the market would continue to reward high-yield investments over the next six months.

On the bullish-bearish spectrum for broad economic sectors, managers continue to be most bullish on information technology, industrials and energy:

• Fully 13% of managers are very bullish, and 56% of managers are bullish on the information technology sector.
• Industrials had 63% percent of managers with a bullish view.
• Utilities and telecom services were in the bottom two most-bearish positions.

For its survey, Northern Trust polls investment firms that participate in its multi-manager investment programs and funds. The select group of respondents includes fixed income and equity managers across value and growth styles, with a bias toward fundamental, bottom-up stock picking strategies. The survey is conducted quarterly so that Northern Trust and participating managers can examine trends in attitudes and allocations. More information, including the full survey report and a video of this quarter's highlights, can be found at www.northerntrust.com/managersurvey.

Northern Trust is a leading provider of multi-manager investment solutions, with more than $52.8 billion under management as of March 31, 2014, for institutional and personal clients. Northern Trust invests with more than 200 external managers worldwide, offering personal and institutional solutions that include retail mutual funds, alternative asset classes, emerging manager programs and total investment program management.

Asset Management at Northern Trust comprises Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc. and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

About Northern Trust

Northern Trust Corporation NTRS is a leading provider of investment management, asset and fund administration, banking solutions and fiduciary services for corporations, institutions and affluent individuals worldwide. Northern Trust, a financial holding company based in Chicago, has offices in 18 states, Washington, D.C., and 18 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of March 31, 2014, Northern Trust had assets under custody of US$5.8 trillion, and assets under investment management of US$915.4 billion. For more than 120 years, Northern Trust has earned distinction as an industry leader in combining exceptional service and expertise with innovative products and technology. For more information, visit www.northerntrust.com or follow us on Twitter @NorthernTrust.

Photos/Multimedia Gallery Available: http://www.businesswire.com/multimedia/home/20140715006346/en/