Investment managers characterize the US economy as resilient, whether or not the Federal Reserve curtails its current quantitative easing (QE3) program, according to a survey by Northern Trust.
The survey of approximately 100 managers, taken between September 4 and September 18, also found nearly all nine out of 10 expected the political stand-off over the federal government shutdown and the US debt ceiling would have at most a modest impact on US equity markets.
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Managers expressed optimism on several key economic factors:
- 86% believe job growth will either remain stable or accelerate over the next 6 months
- 71% expect housing prices to rise over the next 6 months
- 89% expect corporate profits to remain stable or increase in the fourth quarter
Investment managers identified a change in Federal Reserve monetary policy or QE tapering as the top risk to equity markets. Long-term interest rates are expected to rise when the Fed tapers its bond purchases under the QE program. However, more than 60% believe the US economy will keep growing if the 10-year rate rises by 50 basis points, and 42% of managers said long-term rates could rise by 1% without stifling economic growth.
At the time the survey was taken, 53% of managers expected the impasses in Washington over a continuing resolution to fund the federal government and a measure to authorize an increase in the federal debt ceiling will lead to a modest decline in the US equity market, while 40% expected little to no effect on the market.
Mark Meisel, senior investment product specialist of the multi-manager solutions group, said: "The change in monetary policy was still the number one risk on managers’ minds this quarter. Most managers are expecting that Washington will sidestep the budget and debt ceiling issues prior to significant harm being inflicted on the markets."
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By GlobalDataLooking outside the US, managers are seeing value in Emerging Markets equities after losses in those markets in 2013. About two-thirds (64%) of managers believe emerging markets equities are undervalued, up from 49% in the second quarter.
However, managers don’t expect strong performance to return soon: Only 23% of managers expect emerging market equities to outperform developed market equities over the next 6 months. Managers also view European equities favorably with more than half (53%) saying European equities are undervalued. Most managers (69%) believe the Japanese equity market is undervalued or appropriately valued.
On the bullish-bearish spectrum for asset classes and broad economic sectors, managers continue to be most bullish on US large-cap equities, US small caps and emerging market equities:
- 62% of managers are bullish on U.S. large caps.
- For small-caps, 53% of managers are bullish, down from 59% in the second quarter.
- 51% are bullish on emerging market equities versus 53% in the second quarter.
- Managers were most bullish on information technology, industrials and health care.
