Investment Managers Dim on U.S. Economic Outlook

No recession is forecast, but investment managers show less confidence in U.S. economy, according to Northern Trust’s second-quarter survey.


Investment managers are becoming less positive on the U.S. economy and corporate earnings because of the expected negative impact of a recession in Europe and slower growth in China, according to the survey.

However, fewer than 10% believe the global risks will be severe enough to push the U.S. economy into recession. 

A majority of the 100 investment managers surveyed in mid-June believe Greece will either remain in the European Monetary Union or make an orderly exit from the currency, while 31% expect a Greek exit from the Eurozone will create a contagion effect that spreads recession to other countries. Nearly a quarter of managers surveyed believe countries other than Greece will leave the Eurozone.

“As a result of these macro concerns and higher levels of uncertainty, our survey shows that the previously positive outlook for U.S. economic growth has deteriorated this quarter,” said Chris Vella, chief investment officer for Northern Trust Multi-Manager Investments. “While investment managers are not anticipating that the U.S. will fall into a recession, the vast majority believe that the U.S. will face a more severe slowdown than anticipated. Growing numbers of managers expect market volatility to increase and are holding above average levels of cash this quarter, reflecting their cautious stance.”

Northern Trust’s survey found some cause for optimism: A growing majority of managers (67%) found U.S. equity markets to be attractively valued, with more than a quarter seeing more than 10% upside. One-third of respondents see housing prices rising in the next six months, the highest number since the survey began in the third quarter of 2008.



“Investment managers continue to have confidence in U.S. large-cap equities and are most bullish on the information technology, consumer discretionary and health care sectors,” said Kelly Finegan, an investment analyst for Northern Trust Multi-Manager Investments, who oversees the survey. “U.S. small caps and emerging markets equities are also favored, and more managers are bullish on private real estate. This quarter, the outlook for energy stocks deteriorated and managers remain most negative about utilities, with more than half expressing a bearish view on that sector.”

Key findings from the second-quarter survey include: 

·40% of managers expect job growth to decelerate through the second half of the year, compared with 16% who held that view in the first quarter; 37% believe job growth will remain stable, down from 49% in the first quarter and 55% in 4Q 2011.

·29% believe earnings will grow in the next three months, a significant drop from 53% last quarter, while those anticipating a decrease in corporate earnings in the next quarter, rose to 32%, from 23% in Q1 2012.

·41% expect Greece will remain in the European Monetary Union (EMU), while 29% anticipate a smooth Greek exit from the Eurozone. Twenty-three percent of managers think it is likely that countries other than Greece will leave the EMU.

·65% of managers expect market volatility, as measured by the Volatility Index, will increase over the next six months. That is up from 19% who expected higher volatility in the first quarter and the highest level since the inception of the survey in 3Q 2008.

·19% of managers held above average levels of cash in the second quarter, up from 12% in the previous quarter.

·20% of managers expect U.S. gross domestic product growth will accelerate in the next six months, down from 43% with that view in the first quarter, and the smallest portion holding that view since the first quarter of 2009. Thirty percent expect GDP growth to decelerate, up from 13% in the previous quarter.

Northern Trust polled fixed-income and equity managers across value and growth styles, with a bias toward fundamental, bottom-up stock-picking strategies. All respondents to the survey participate in Northern Trust’s external manager platform. The survey is conducted quarterly to examine trends in attitudes and allocations.