Northern Trust Survey: Geopolitical Risks and Volatility Temper Investment Manager Outlook

Investment managers have moderated their expectations for growth in the U.S. economy and identified geopolitical risk and increased market volatility as top concerns, according to a quarterly survey conducted by Northern Trust Asset Management.

In the third quarter survey, taken September 5-19, more than a third of investment managers (34 percent) expect geopolitical risk to increase over the next six months, while another 63 percent expect geopolitical concerns will continue to be a moderate factor weighing on financial markets. Managers also ranked geopolitical risks as the top risk to equity markets for the second quarter in a row.

Change in U.S. monetary policy and an economic slowdown in Europe rank as the second and third highest risks for the approximately 100 investment managers who responded to the survey. Possibly related to those risks, 70 percent of managers expect market volatility to increase over the next six months – the highest reading on expected volatility since the survey was launched in the third quarter of 2008.

“Managers’ concerns about the eurozone economy and U.S. market volatility have been borne out in recent weeks and are likely to continue, as our survey indicates,” said Christopher Vella, Chief Investment Officer for Multi-Manager Solutions, which conducts the survey. “In concert with those risks, managers tended to moderate their expectations for a number of U.S. economic indicators, shifting toward stable growth instead of higher growth when compared to last quarter’s survey.”

While nearly all (95 percent) of managers expect U.S. gross domestic product (GDP) growth to remain stable or accelerate over the next six months, the portion expecting faster growth dropped to 47 percent in the third quarter from 68 percent in the prior survey. On housing, a majority (52 percent) expect prices to rise over the next six months, down from 56 percent in the previous quarter, while those expecting prices to remain stable rose to 46 percent from 39 percent in the last survey.

An exception to the moderating trend was corporate earnings, where a higher percentage of managers (72 percent versus 65 percent in the second quarter) expect U.S. company profits to increase over the next three months.

However, managers are most bullish on emerging market equities, ranking them ahead of U.S. large-capitalization equities – the first time in more than three years that U.S. large-cap stocks have not ranked first in the bullish category. Emerging market equities are also considered undervalued by the largest percentage of managers: 59 percent versus 24 percent for U.S. equities.

“The disparity between the valuations for U.S. large cap equities and emerging market equities finally outweighed the mixed economic news coming out of emerging markets,” said Mark Meisel, Senior Investment Product Specialist for Multi-Manager Solutions, who oversees the survey.

Other findings of the third quarter survey include:

• While managers expressed concern about recession in the eurozone, 69% of survey respondents expect the European Central Bank’s measures to cut key interest rates and take additional stimulative measures in early September will have a positive impact on European equity markets over the next three months.
• Despite the potential for a power shift in Congress toward the Republicans in the upcoming mid-term U.S. elections, 89% of managers do not think the elections will have a significant impact on financial markets. However, those who believe the elections will affect the financial markets overwhelmingly expect the impact will be positive.
• 20% of managers believe regulations such as the Dodd-Frank Act have had a substantial impact on bond market liquidity, by leading some financial institutions to exit or reduce their exposure to trading in fixed-income markets. Another 36% of investment managers believe regulatory changes have somewhat reduced liquidity, 11% do not believe the impact has been substantial and 33% do not know the impact.
• On the bullish-bearish spectrum for broad economic sectors, managers continue to be most bullish on information technology (78%), industrials (57%) and health care (53%), and most bearish on utilities and telecom services.

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. For more detail, please visit www.northerntrust.com/managersurvey.

Northern Trust is a leading provider of multi-manager investment solutions, with $57.3 billion under management and $41.8 billion under advisement as of June 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 19 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of June 30, 2014, Northern Trust had assets under custody of US$6 trillion, and assets under investment management of US$924.4 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 www.northerntrust.com and 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 http://www.northerntrust.com/disclosures.