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Managers remain positive despite market risks, says Northern Trust

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Investment managers expect further growth in the US economy and do not expect that problems in emerging markets will spread to developed markets, according to a survey by Northern Trust.

The survey of approximately 100 managers, taken March 4-19, found that only 11 per cent of managers believe that financial market volatility and a slowing rate of economic growth in emerging markets create a significant risk of contagion for developed markets.
 
A large majority – 89 per cent – say there is only a small to modest probability (under 25 per cent) that emerging markets challenges will spread to developed markets. Also, 79 per cent of investment managers believe that the weak US economic data reported in recent months is temporary, and expect stronger numbers to return in the second quarter of 2014.
 
"Managers are wary, but still optimistic, with a positive view of US economic fundamentals," says Christopher Vella, chief investment officer for multi-manager solutions at Northern Trust. "Managers expect US GDP, corporate profits, housing prices and jobs to continue to improve, and that confidence appears to outweigh their concerns about geopolitical risks like the Ukraine-Russia conflict and the slowdown in emerging markets' economic growth."
 
As in the previous quarter, managers are positive regarding US economic fundamentals: over the next six months, 89 per cent believe job growth will remain stable or accelerate and 97 per cent expect steady or accelerating US GDP growth, while 95 per cent of respondents believe corporate earnings will increase or remain stable over the next three months. In addition, 73 per cent of managers expect housing prices to rise up to 10 per cent in the next six months, as compared to 66 per cent with that view last quarter.
 
But fewer managers than last quarter anticipate an increase in interest rates: 48 per cent expect rates to rise over the next three months, versus 66 per cent in the fourth quarter. Most managers, 67 percent, expect inflation to remain the same, while 33 per cent expect a rise in inflation over the next six months. The vast majority of managers — 90 per cent — are in line with their historical cash positions. A sizeable minority of managers, 27 per cent, were more risk- averse in the first quarter than previously, while 63 per cent reported no change in their risk aversion compared to three months ago. About 70 per cent of investment managers believe market volatility as measured by the Chicago Board Options Exchange's Volatility Index (VIX) will increase over the next six months, a slight increase from 64 per cent in the fourth quarter
 
Emerging market equities are viewed as having the best valuations by managers: 64 per cent believe emerging market equities are undervalued, up from 57 per cent in the fourth quarter. European equities are seen as undervalued by 54 per cent of investment managers. This compares with 30 per cent of the managers who view US equities as undervalued while 42 per cent see US equities as appropriately valued. Even though emerging markets seem to have the most favourable valuations, they are ranked fourth in terms of bullishness, behind US large cap equities, non-US developed markets and US small cap equities.
 
"Investment managers expect continued improving fundamentals within the US, supporting their bullish view on US equities, despite less favourable valuations," says Mark Meisel, senior investment product specialist of the multi-manager solutions group, who oversees the survey. "When asked about investing in emerging markets, 41 per cent of managers says there are still too many uncertainties and 27 per cent responded that fundamentals do not support their current valuations."

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