Money Managers Fret About Inflation, Softening Real Estate Market

A Russell news release said 22% of managers identified increasing inflation as their chief worry about the health of the equity markets. One in five cited geopolitical instability and 15% pointed to a softening real estate market.

“The overall market sentiment is bullish and tilted positively toward stocks, but these managers are nervous, cautious bulls,’ said Randy Lert, chief portfolio strategist, Russell Investment Group, in the news release. “They see risk, but there is a sharp divergence in opinion on where the source of market turmoil ultimately lies. Some managers are worrying over inflation while others fear a slowdown. The managers are hoping that economic growth will be neither too fast nor too slow.’

Market Valuation Levels

In general, managers saw less value in the equities markets in the latest quarter, as the percentage of managers believing the market is undervalued dipped from last quarter’s all-time high of 37% to 24%.

After the February 27 stock selloff, 20% of managers pointed to a softening real estate market as the largest risk in U.S. equity performance over the next year, reflecting a substantial rise in concern from only 8% before. In a similar swing, sentiment toward the financial services sector became dramatically less positive when managers responded to the survey after the market decline – 61% of managers said they were bullish on this sector prior to February 27, as compared to 39% after.

According to Russell, the vast majority of managers (78%) are bullish on large-cap growth stocks. The annual returns for this asset style have trailed those for value stocks for a number of years and managers are anticipating a return to the mean, Russell said.

Also, managers are still most bullish on the health care and technology sectors, at 73% and 72%, respectively. They are most bearish on autos and transportation (60% bearish). Managers also maintain their enthusiasm for non-U.S. equities in developed markets, but they have dropped their bullishness toward equities in emerging markets by about 15 percentage points from last quarter.

Russell conducted the current Investment Manager Outlook between February 26 and March 5, 2007. More information is available at www.russell.com.