Investment Horizon: Higher Volatility, Continued Strong U.S. Growth

Geopolitics, European economy top risks to equities

January 26, 2015 –  CHICAGO–(BUSINESS WIRE)–Investment managers overwhelmingly expect market volatility to increase in the first half of 2015 and remain concerned about geopolitical risk and a slowdown in Europe, but those issues do not alter a generally positive view of U.S. economic and corporate profit growth, according to a quarterly survey conducted by Northern Trust Asset Management.

“Most of the managers in the survey make investment decisions on fundamental analysis and they seem to remain cautiously optimistic on U.S. equities.” Eight in 10 managers said they expect volatility, as measured by the Chicago Board of Options Exchange Volatility Index (VIX), to increase over the next six months.

The fourth quarter 2014 survey, taken December 3-18, set a new high for volatility expectations since the survey’s launch in October 2008, surpassing the previous high of 70 percent in the third quarter 2014 survey. The impact of falling oil prices and the strengthening U.S. dollar, as well as increased allocations to index and “smart beta” strategies over fundamental active equity investments, were also topics of the fourth quarter 2014 survey.

“Managers expect volatility to increase due to geopolitical instability, economic slowdowns in Europe and Japan, U.S. equity valuations and a dramatic drop in oil prices,” said Christopher Vella, Chief Investment Officer for Multi-Manager Solutions at Northern Trust. “Although managers foresee a difficult market, they also expect U.S. economic fundamentals to hold up and are still bullish on U.S. large cap equities."

On Deck: A European Slowdown

A European economic slowdown moved up to second place in the managers’ ranking of risks to equity markets, and more than half (55 percent) of respondents expect the eurozone’s gross domestic product (GDP) will remain flat to negative over the next six months. Nearly all managers expect the European Central Bank to implement a quantitative easing (QE) program, and 54 percent expect it to go into effect in the first quarter. Investment managers’ expectations regarding the U.S. economy remain strongly positive:

  • 95% expect corporate profits to either remain the same or increase in the first quarter of 2015
  • 86% expect job growth to either remain stable or accelerate over the next six months
  • 61% expect housing prices to increase over the next six months, up from 52% the previous quarter

A relatively large percentage of managers, 18 percent, expect that inflation will decrease over the next six months. That view is likely caused by the recent drop in oil prices, which a vast majority of respondents (86 percent) believe will have a positive effect on global GDP, while 11 percent expect a negative impact from lower oil prices. Similarly, more than three-quarters (76 percent) of the managers believe the strengthening U.S. dollar will have just a modest negative impact on U.S. corporate earnings, while 19 percent believe it will have little to no impact, or a net positive impact on U.S. corporate earnings.

“Given the relative strength in the U.S. economy, most managers do not expect the dramatic decline in the price of oil or the strength in the U.S. dollar to derail the U.S. equity market,” said Mark Meisel, Senior Investment Product Manager of the Multi-Manager Solutions group, who oversees the survey. "Most of the managers in the survey make investment decisions on fundamental analysis and they seem to remain cautiously optimistic on U.S. equities.”

US Equities overvalued?

Offsetting the positive views somewhat, 36 percent of managers said U.S. equities are overvalued, the largest share with that view in the survey’s history. Emerging markets are seen as undervalued by 53 percent, while 49 percent view European equities as undervalued. On the bullish/bearish spectrum for asset classes and broad economic sectors, managers are most bullish on U.S. large cap equities, non-U.S. developed equities and information technology, consumer discretionary and industrials:

  • Asset classes: Bullish on U.S. large-cap equities (48%), non-U.S. developed equities (45%) and emerging market equities (42%); bearish on U.S. fixed income (65%) and commodities (61%)
  • Sectors: Bullish on information technology (73%) and consumer discretionary (64%); bearish on utilities (69%), materials (45%) and telecom services (43%)
inflation will decrease over the next six months... that view is likely caused by the recent drop in oil prices

The fourth quarter 2014 survey also asked for views on a business issue facing active managers: the increasing asset flows and market share of passive (and smart beta) strategies. A large majority of managers (68 percent) believe that the increase in the market share of passive/smart beta strategies will not have an effect on their ability to generate excess return (alpha) over their benchmark. However 22 percent believe the growth of these strategies will have a short-term effect on their ability to produce excess returns and 10 percent expect a long-term, systematic impact.

And while just over half (51 percent) of managers experienced no negative impact from the growth of passive/smart beta strategies, 46 percent report that flows into passive/smart beta products have had a modest negative impact on their active businesses. Over the next five years, most (51 percent) expect passive strategies to gain modestly higher market share of investment assets, while 9 percent believe those strategies will have significantly higher market share and 41 percent expect the same or lower market share for passive/smart beta strategies over the next five years.

For more details, please see the full Investment Manager Survey Report on Northern Trust’s web site. 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. Northern Trust is a leading provider of multi-manager investment solutions, with $55.1 billion under management and $44.3 billion under advisement as of September 30, 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 (Nasdaq: NTRS) is a leading provider of asset servicing, fund administration, asset management, fiduciary, and banking solutions for corporations, institutions, families, and individuals worldwide. Chicago-based Northern Trust has offices in 19 states, Washington, D.C., and 20 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of December 31, 2014, Northern Trust had assets under custody of US$6 trillion, and assets under investment management of US$934.1 billion. For 125 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 and follow us on Twitter @NorthernTrust.