SEATTLE--()--After several years of watching the European debt crisis unfurl, professional money managers are split on the nature of the impact they expect developments in the eurozone crisis to have on the U.S. equity markets over the next year.
“The markets don’t like uncertainty and managers are still looking for clarity on many issues, from the eurozone to the U.S. presidential election and the U.S. fiscal cliff”
According to the latest U.S. Investment Manager Outlook (IMO), a quarterly survey conducted by global asset manager Russell Investments, nearly half of the managers surveyed (48 percent) expect developments in the eurozone to have a negative impact on the markets over the next year – pointing to the anticipation of minimal progress toward meaningful resolution. However, 33 percent of managers expect eurozone debt crisis developments to impact the equity markets positively, citing expectations of resolution and a belief that many of the possible negative outcomes are already priced into the markets.
For the current installment of the IMO survey, Russell collected the opinions of nearly 200 U.S. senior-level investment decision makers at equity investment management firms as well as at fixed-income investment management firms. Respondents were surveyed between Aug. 23 and Sept. 4.
Investment managers also pointed to the outcome of the U.S. presidential election (30 percent) and the outcome of the U.S. “fiscal cliff” situation (28 percent) as the events they expect to have the greatest positive impact on the U.S. markets in the next year. On the other hand, many managers (37 percent) pointed to the fiscal cliff − or the expiration of certain tax cuts and the imposition of automatic spending reductions at the end of 2012 − as an event with a negative expected impact. Managers also expect developments in China’s economic situation (18 percent) to have a negative effect on the markets.
“The markets don’t like uncertainty and managers are still looking for clarity on many issues, from the eurozone to the U.S. presidential election and the U.S. fiscal cliff,” said Rachel Carroll, consulting client executive at Russell Investments. “Any resolution or meaningful progress on these topics could precipitate a brisk upswing in the markets – which speaks to the benefits for many investors of staying invested and diversified despite expected short-term volatility.”
Specific to the eurozone issues, Carroll added that positive developments have been seen recently with the European Central Bank’s announcement of a broad bond-buying plan and the approval of the European Stability Mechanism by Germany’s Constitutional Court. “While an escalation of the euro-crisis seems unlikely for the next few months, some managers are looking for other underlying issues in Europe to be addressed. At Russell, we also believe that to achieve full resolution, we will need to see greater European banking oversight, re-capitalization of significant banks and some type of ‘FDIC-like’ eurozone-wide depositor insurance.”
Managers’ GDP growth expectations diminished, looking to the Fed
Despite the notable initial market reaction to the announcement of the Federal Reserve’s plan to initiate a third round of quantitative easing (QE3) and other efforts to support economic recovery, U.S. Federal Reserve policy action was not among the top events managers expected to be most impactful on the markets.
The IMO survey was conducted before the Sept. 13 Federal Reserve announcement, but nearly three-quarters (72 percent) of survey participants said they expected the Fed to employ some type of intervention in the next year. However, just 17 percent of managers indicated that policy action by the Fed would be a major event making a positive impact on the markets over the next year.
Additionally, most managers (73 percent) indicated that they expect U.S. real gross domestic product (GDP) growth to fall between 1.5 – 2 percent in the next year. This represents a less optimistic view than seen in the June 2012 IMO, when 58 percent of managers expected GDP growth to stay around 2.5 percent.
“Like many managers, Russell recently downgraded our U.S. GDP growth outlook and felt the projected pace of growth was not enough to make meaningful inroads for the economy and unemployment rate. We expected the Fed to respond and saw that come to pass in recent weeks,” said Carroll. “Many managers also expected QE3, but may have felt it was priced into the markets to some degree and would have a less significant impact than other events. Yet with the market reaction we saw after the Fed announcement, it’s clear that investor sentiment was buoyed by the open-ended nature of QE3 and other efforts signaling the Fed’s commitment to growing the economy. For this to continue, many managers are likely looking for meaningful improvement in economic data and resolution of other headwind issues.”
Manager bullishness flat for most asset classes, up in real estate
The latest IMO survey showed manager bullishness on most asset classes over the next 12 months was down or nearly the same as in the June 2012 survey. U.S. large cap growth equities saw an all-time survey low for manager bullishness at 53 percent, representing a 20 percentage point decline from levels seen in the September 2011 IMO survey. Over the same time period, bullishness for U.S. large cap value equities and emerging market equities fell 11 and 24 percentage points respectively to 52 percent and 50 percent bullishness.
Meanwhile, real estate reached an all-time survey high at 55 percent bullishness, becoming the asset class managers were most bullish on for the first time in survey history. Non-U.S. developed market equities also saw an 11 percentage point increase in bullishness from the June 2012 IMO to 38 percent.
Bullishness for cash and U.S. Treasuries was down to 7 percent for both asset classes in the latest survey, from 17 percent and 12 percent respectively in the June 2012 survey.
“Managers’ outlooks for many equity asset classes are likely being influenced by their expectations of slow economic growth in the U.S. and continued uncertainty in the near term surrounding the key issues impacting markets,” said Carroll. “Yet they aren’t running to historical ‘safe havens’ like cash or Treasuries, but instead are looking to areas that appear more attractive on a relative basis like real estate, which offers appealing dividend yields as well as strong valuations thanks to modest new construction levels benefiting existing properties.”
Managers looking to pro-cyclical, growth-oriented sectors
Managers’ sector outlooks in the latest IMO suggested their preference for more pro-cyclical, growth-oriented sectors such as technology (up 11 percentage points from June 2012 to 76 percent bullishness) and energy (up 12 percentage points from June 2012 to 51 percent bullishness). More traditionally “defensive” sectors such as utilities (14 percent bullishness) and consumer staples (30 percent bullishness) saw major drops in bullishness of 11 and 15 percentage points respectively.
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: http://www.russell.com/US/market_insights/Investment_Manager_Outlook/investment_manager_outlook.asp.
About Russell Investments
Russell Investments (Russell) is a global asset manager and one of only a few firms that offer 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.
Russell has about $152 billion in assets under management (as of 6/30/2012) and works with 2,300 institutional clients, more than 500 independent distribution partners and advisors, and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.4 trillion in assets under advisement (as of 12/31/11). It has four decades of experience researching and selecting investment managers and meets annually with more than 3,000 managers around the world. Russell traded $1.5 trillion in 2010 through its implementation services business. The Russell Global Indexes calculate over 50,000 benchmarks daily covering 85 countries and more than 10,000 securities.
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