Managers Cautiously Hopeful for U.S. Economy, Eurozone and China in 2013

Survey: Majority of professional money managers consider U.S. market to be fairly valued

SEATTLE–(BUSINESS WIRE)–For 2013, a majority of professional money managers are optimistic for continued economic growth in the U.S. and expect that modest progress will be made on some of the issues that impacted markets in 2012, according to the latest U.S. Investment Manager Outlook (IMO), a quarterly survey conducted by global asset managerRussell Investments.

“Money managers have been keyed into a variety of issues fueling market volatility throughout 2012. With the conclusion of the U.S. presidential election, at least one element of uncertainty has been taken off the table,” said Rachel Carroll, consulting client executive for Russell Investments. “Yet as 2013 approaches, managers are still looking for clarity on concerns such as the ‘fiscal cliff,’ the eurozone debt crisis and slowing growth in some emerging economies. However, many managers appear hopeful that 2013 will bring more good news than bad on these issues.”

Overall, the majority of managers (54 percent) believe the U.S. stock market is fairly valued, with a small minority (14 percent) believing it is overvalued.

“At Russell, our expectation for 2013 is a continuation of moderate U.S. and Chinese economic growth against a backdrop of episodic European-generated volatility,” said Carroll. “Overall, our outlook for next year is one of low but differentiated returns across asset classes. We believe this will be an environment in which many investors could benefit from access to disciplined active management and globally diversified, multi-asset strategies.”

The current IMO survey is being released on the heels of Russell’s 2013 Annual Global Outlook which outlines six key themes that Russell believes will have the greatest impact on markets and asset returns in 2013:

1. U.S. economic outlook: A time to address long-term issues at last?

2. The eurozone: Finding the right policy mix

3. Global equities: A rising tide may not lift all boats equally

4. Emerging markets: Due for outperformance

5. Global currency outlook: More of the same, but risks aplenty

6. Commodities: It’s not just about monetary policy

Managers expect European Union to remain intact

The majority of IMO survey respondents (65 percent) say they do not expect any countries to exit the European Union in 2013. Of the 22 percent who believe a country or countries will leave the European Union, more than half (56 percent) are not planning to make any changes to their portfolios, while an equal proportion are planning to decrease exposure to U.S. equities (14 percent) and European equities (14 percent).

“2013 will likely be another year of ‘tug-of-war’ in Europe between austerity and growth-oriented policies that will fuel volatility. But, we believe that an exit in the next year by either an economically weak country like Greece or a strong country is unlikely,” said Carroll. “The European Union needs to find the right policy balance to deal with the debt crisis issues but we believe there is enough support for continued progress toward resolution.”

A slowly-but-surely improving U.S. economy?

Managers’ views on U.S. GDP growth reflect increased optimism for 2013. Forty-two (42) percent of respondents indicate that they expect U.S. real gross domestic product (GDP) growth to fall between 1.5 – 2 percent in 2013, while 28 percent expect growth between 2 – 2.5 percent. This represents an improvement over September’s IMO survey, when 35 percent said they expected growth between 1.5 – 2 percent and just 16 percent expected growth above 2 percent in the next year.

The majority of managers (56 percent) expect GDP growth to be driven primarily by personal consumption, while 21 percent point to domestic business investment as a key driver of growth.

“Overall, our outlook for next year is one of low but differentiated returns across asset classes. We believe this will be an environment in which many investors could benefit from access to disciplined active management and globally diversified, multi-asset strategies.”

“A low-growth economy is also likely to be a less volatile economy. At Russell, we expect that the U.S. economy will continue to grow in 2013 and that fiscal tightening efforts will not be severe enough to send the U.S. into recession,” said Carroll. “Consistent with many managers’ expectations, we anticipate year-on-year real GDP growth in 2013 to be 2.1 percent, increasing to 2.5 – 2.75 percent by the second half of the year.”

Managers on China and non-U.S. markets

Many managers have been watching China’s policy efforts to stabilize slowing economic growth. According to the survey, 62 percent of managers say they expect China to achieve a “soft landing” in 2013, while 32 percent indicate they do not believe the issue will be resolved next year.

The latest IMO survey also shows an increase in manager bullishness for emerging market equities, up 17 percentage points to 67 percent compared to the September IMO survey. Manager bullishness for non-U.S. developed equities (49 percent) saw an 11 percentage point jump since September after several quarters of less bullish sentiment.

“Despite lower forecasted growth for countries like China and India than has been seen in the past, many managers appear to expect emerging markets to outperform relative to developed economies. A majority of managers surveyed believe China will engineer economic stabilization, which may be making this area more attractive,” said Carroll. “Managers’ interest in the non-U.S. developed markets also appears to be ticking up. Yet with the expected eurozone volatility in 2013, within this asset class managers will likely continue to focus on European equities that are of higher quality with attractive valuations and fundamentals.”

Managers on real estate and sector outlook

For the second IMO survey in a row, real estate was among the asset classes that managers were most bullish on at 61 percent – a new all-time survey high.

Manager bullishness for the technology sector dropped 19 percentage points to 57 percent from the September survey, down to the lowest level seen since 2006. Among the other sectors that managers were most bullish on in the latest survey were health care (55 percent) and energy (52 percent).

“While most managers surveyed are bullish on technology, some may be pulling back due to disappointing global demand as businesses demonstrate some reluctance to make capital expenditures. The sector’s significant non-U.S. exposure served as a positive driver for some time, but with expected slower growth in the emerging markets and the continued eurozone issues, managers may feel less bullish for the near-term,” said Carroll.

About the Investment Manager Outlook

Russell’s analysts hold more than 3,000 research meetings each year with investment managers around the world. Based on these conversations, Russell provides a unique perspective on manager research. The Investment Manager Outlook is Russell’s ongoing survey intended to generate a meaningful snapshot of investment manager sentiment each quarter.

More information about the IMO, including a video and a full report of findings, can be found at:

About Russell Investments

Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Working with institutional investors, financial advisors and individuals, Russell’s core capabilities extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes.

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