The possibility of a change in US Federal Reserve monetary policy or its ‘quantitative easing’ stimulus programme poses the greatest risk to equity markets over the next six months, which in turn has tempered investment managers’ outlook, according to a quarterly survey of investment managers by Northern Trust.
Out of approximately 100 investment managers who participated in the survey, 62% said comments indicating the Fed would slow the pace of its bond purchases under the quantitative easing or QE program would lead to higher interest rates in the next three months.
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A change in Fed policy also displaced a European debt crisis as the greatest potential risk to equity markets in the next six months, according to a ranking by managers in the survey.
After two quarters of rising optimism on the US economy, the survey found tempered enthusiasm on housing prices and jobs, although managers still hold positive views on the US economy and stock market. For example, nearly three-fourth (76%) of managers expect housing prices to rise in the next six months, but that figure is down from 88% in the first quarter survey.
Meanwhile, 22% of respondents said that they expect housing prices to remain stable, up from only 9% who held that view in the previous quarter.
On jobs, too, there was a shift in expectations from accelerating improvement to stable, slower growth. Nearly 57% of respondents expect stable job growth in the next six months, while those expecting accelerating job growth fell to 29% from 38% in the first quarter survey.
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By GlobalData"Monetary policy announcements in the US have led to increased volatility in equity markets," said Chris Vella, chief investment officer for Northern Trust Multi-Manager Solutions. "Despite this volatility, most of our managers have a positive view on key economic indicators in the US, which may be why they continue to have supportive views on the U.S. equity market’s current valuation."
The survey report also states that 77% of managers surveyed believe the US equity market is undervalued or appropriately valued, a small change from 73% with that view in the first quarter. US Large Cap Equity and US Small Cap Equity topped the asset class rankings in the survey’s "Bull/Bear Indicator."
Looking outside the US, managers were evenly split, 51-49 percent, on whether emerging market equities will outperform equities in developed markets like Europe and Japan during the second half of 2013.
Investment managers were found to be positive toward European equity valuations as 59% believe European equities are undervalued, up from 36% in the previous quarter. Only 9% of managers view the region’s equities as overvalued, down from 26% in the first quarter.
"The valuation assessments of the various equity regions by investment managers reflected a fair amount of changes from the previous quarter," said Mark Meisel, senior investment product specialist of the Multi-Manager Solutions group, who oversees the survey.
"This was probably due to the volatile and varied performance among the regions, with the US equity market up just under 14% through June, emerging market equities down nearly 10%, European equities flat and Japanese equities up over 15% on a US dollar basis," Meisel added.
