In Northern Trust’s fourth quarter 2011 survey, 81% of participating investment managers expect job growth to remain stable or accelerate over the next six months, an increase of nine percentage points from the third quarter survey. In addition, 74% believe economic growth, as measured by GDP, will remain stable or accelerate over the same period, 10% more than the previous quarter. More than half (52%) expect corporate earnings to increase in the next three months, up from 34% who held that view in the prior quarter.
However, this optimism is tempered by concerns over the ongoing debt crisis in Europe, with managers ranking this issue as the biggest risk to equity markets during the first half of 2012. A majority of managers (56%) believe a continuation of the crisis will likely result in one or more countries being asked to exit the European Union.
Managers continue to find attractive buying opportunities in U.S. equities, but the perceived degree of undervaluation changed significantly compared to the third quarter survey, following a significant upswing in equity markets during October. Thirty-three percent of managers believe the Standard & Poor’s 500 Index is undervalued by more than 10%, compared to 52% who held this view in the prior quarter. At the same time, the group of managers that see the S&P 500 as undervalued by 10% or less grew to 42% in the fourth quarter, up from 23% previously. Managers also shifted to a more bullish outlook on emerging market equities, with 61% stating that the asset class was undervalued, up 15 percentage points from their third quarter view.
Other major findings from the survey include:
- Managers were most bullish on U.S. large cap equities, U.S. small cap equities and emerging markets during the quarter. They were most bearish on conservative fixed income instruments such as Treasuries and investment grade bonds.
- The percentage of managers holding above average levels of cash came down modestly from 23% in the third quarter to 15% in the fourth quarter.
- Managers identified technology, energy and consumer staples as the three sectors that they are most bullish about going forward, while they are bearish on financials, utilities and materials.
- Respondents had mixed views on the potential impact from another sovereign debt downgrade in the U.S. While 51% of managers said a downgrade would have minimal impact, 44% indicated the impact would be negative and 5% said it would be positive.
The survey of 105 institutional managers was conducted in mid-December. Respondent firms participate in Northern Trust’s external manager platform for multi-manager investment solutions.