Ear To The Ground

Investment Managers Less Optimistic Regarding U.S. Job Growth

Expect Increased Market Volatility;
U.S. Equity Valuations Seen as Less Attractive

July 22, 2016 — CHICAGO–(BUSINESS WIRE)–Concerns about job growth, political uncertainty and market volatility weighed on investment managers even as positive sentiment continued to rise in the most recent quarterly survey by Northern Trust Asset Management.

More managers viewed U.S. equities as overvalued and were holding above-normal levels of cash in portfolios, according to the survey.

The survey of 100 investment firms, taken June 3-17, also gauged opinions on the growth of passive investing and asked managers to rank the valuations of yield-oriented sectors.

“The outlook on U.S. economic growth, job growth and corporate profits is still largely positive,” said Christopher Vella, Chief Investment Officer for Multi-Manager Solutions at Northern Trust. “However, on the margin managers are less favorable on a number of economic and market indicators than last quarter.”

On the positive side, 42 percent of managers believe U.S. gross domestic product (GDP) growth will accelerate over the next six months, an increase from 37 percent in the first quarter survey and 23 percent at the end of 2015. Nearly 60 percent of managers expect job growth to remain stable over the next six months.

However, one-third of managers expect U.S. job growth will decelerate over that period, well above the survey’s historical average of 19 percent with that view. And only 6 percent of managers expect job growth to accelerate, tied for the lowest reading since the question became part of Northern Trust’s manager survey in the second quarter of 2011.

A third of managers surveyed (33 percent) expect interest rates to increase over the next three months, down from 40 percent the prior quarter. Two-thirds of managers (68 percent), expect that the Federal Reserve will raise rates only once from June through year-end, and nearly 10 percent expect the Fed will not raise rates at all this year.

Equity Valuations, Market Risks and Opportunities

The view on U.S. equity valuations hit an all-time low for the survey, with just 18 percent of managers saying they believe U.S. stocks are undervalued, while those that view U.S. equities as overvalued reached an all-time high of 46 percent. Emerging market equities are seen as undervalued by 57 percent of managers, the most of any region.

Looking at the top risks facing global equity markets, managers ranked the U.S. Presidential election fourth, up from eighth place in the previous survey. For the fourth quarter in a row, managers ranked emerging market economic growth as the top risk facing equity markets, followed by a U.S. economic slowdown, U.S. corporate earnings and the presidential election.

Given various risks to the financial markets, two-thirds of investment managers, up from 53 percent in the first quarter; expect market volatility, as measured by the Chicago Board Options Exchange’s Volatility Index (VIX), to increase over the next six months.

“A growing segment of managers are becoming more defensive,” said Mark Meisel, Senior Investment Product Manager for Multi-Manager Solutions at Northern Trust. “While not a dramatic change, a significant minority are allocating more money to cash or indicating risk aversion compared to previous surveys.”

One in five managers (21 percent) said they had above-normal allocations to cash in the second quarter. On average, 12 percent of managers have reported holding extra cash over the survey’s history. About 73 percent of managers, slightly below average, have normal allocations to cash.

Managers who reported being more risk averse than they were three months ago increased to 29 percent of those surveyed in the second quarter, up from 22 percent the previous quarter. On another measure of defensive positioning, 22 percent of managers increased their exposure to commodities, compared to an average of 14 percent over the survey’s history.

Political Concerns, Passive Investing and Yield Investments

The outlook on U.S. economic growth, job growth and corporate profits is still largely positive... however, on the margin managers are less favorable

Surveyed prior to the June 23rd UK referendum on leaving the European Union and while the Federal Open Market Committee was meeting and U.S. presidential primaries were concluding, nearly half of the managers (48 percent) said they believe that companies and other entities they follow are delaying key business decisions due to policy and political uncertainties in the market. A slight majority (52 percent) do not believe uncertainty is causing such delays, which could hinder global growth.

A strong majority (58 percent) of managers believe the rising popularity of passive investments has changed financial market behavior. About one-quarter of those have adjusted their investment processes, including liquidity and trading practices, to address the change. Managers were also surveyed on which asset classes are best suited to passive investment strategies.

As higher-yielding investments also draw strong flows, managers ranked global real estate investment trusts (REITs) as the most overvalued asset class, followed by higher-yielding stocks and global listed infrastructure. The least overvalued sectors were emerging market debt, high-yield bonds and master limited partnerships (MLPs).

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. The full Investment Manager Survey Report and a video on survey highlights can be found on Northern Trust’s web site at www.northerntrust.com/managersurvey.




Northern Trust Asset Management is a global asset management firm serving institutional and individual investors in 29 countries, with $906 billion in assets under management as of June 30, 2016. Northern Trust Asset Management offers proprietary and multi-manager solutions across all markets and asset classes, from passive to actively managed strategies, delivered in multiple vehicles. For more information, please visit our website or follow us on Twitter @NTInvest.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, 50 South Capital Advisors, LLC, 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 wealth management, asset servicing, asset management and banking to corporations, institutions, and affluent families and individuals. Founded in Chicago in 1889, Northern Trust has offices in the United States in 19 states and Washington, D.C., and 22 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of June 30, 2016, Northern Trust had assets under custody of US$6.4 trillion, and assets under management of US$906 billion. For more than 125 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit northerntrust.com or follow us on Twitter @NorthernTrust.
Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at https://www.northerntrust.com/disclosures.