Northern Trust Survey: Record Number of Investment Managers Believe U.S. Stocks Overvalued

Jul 22 2016 | 9:58pm ET

Worries about job growth, political uncertainty and market volatility are what keep investment managers up at night despite generally rising market sentiment, according to the most recent quarterly survey by Northern Trust Asset Management. 

More managers viewed U.S. equities as overvalued and were holding above-normal levels of cash in portfolios, according to the survey. NTAM polled 100 investment firms between June 3-17 for the survey, which also gauged opinions on the growth of passive investing and asked managers to rank the valuations of yield-oriented sectors.

“The outlook on U.S. economic growth, job growth and corporate profits is still largely positive,” said Christopher Vella, CIO for multi-manager solutions at Northern Trust. “However, on the margin managers are less favorable on a number of economic and market indicators than last quarter.”

On the positive side, the survey revealed 42 percent of managers believe U.S. GDP growth will accelerate over the next six months, an increase from 37 percent in the first quarter survey and 23 percent at the end of 2015. 

Meanwhile, nearly 60 percent of managers expect job growth to remain stable over the next six months. However, one-third of managers expect U.S. job growth will decelerate over that period, well above the survey’s historical average of 19 percent, NTAM said. And only 6 percent of managers expect job growth to accelerate, tied for the lowest reading since the question became part of Northern Trust’s manager survey in the second quarter of 2011.

A third of managers surveyed (33 percent) expect interest rates to increase over the next three months, down from 40 percent the prior quarter, while 68 percent expect the Federal Reserve will raise rates only once from June through year-end. Nearly 10 percent expect the Fed will not raise rates at all this year.

Other key highlights of NTAM’s survey:

  • In a view certain to hearten contrarians, the view on U.S. equity valuations hit an all-time low for the survey. Just 18 percent of managers saying they believe U.S. stocks are undervalued, while those that view U.S. equities as overvalued reached an all-time high of 46 percent. In a similar vein, emerging market equities are seen as undervalued by 57 percent of managers, the most of any region.
  • Regarding top risks facing global equity markets, managers ranked the U.S. Presidential election fourth, up from eighth place in the previous survey. For the fourth quarter in a row, managers ranked emerging market economic growth as the top risk facing equity markets, followed by a U.S. economic slowdown, U.S. corporate earnings and the presidential election.
  • Given various risks to the financial markets, two-thirds of investment managers (up from 53 percent in the first quarter) expect market volatility, as measured by the VIX, to increase over the next six months.
  • One in five managers (21 percent) said they had above-normal allocations to cash in the second quarter. On average, 12 percent of managers have reported holding extra cash over the survey’s history. About 73 percent of managers, slightly below average, have normal allocations to cash.
  • Managers who reported being more risk averse than they were three months ago increased to 29 percent of those surveyed in the second quarter, up from 22 percent the previous quarter. On another measure of defensive positioning, 22 percent of managers increased their exposure to commodities, compared to an average of 14 percent over the survey’s history.
  • NTAM’s survey took place prior to the UK’s Brexit referendum but while the FOMC was meeting and U.S. presidential primaries were concluding. Nearly half of the managers polled (48 percent) said they believe that companies and other entities they follow are delaying key business decisions due to policy and political uncertainties in the market. However, a slight majority (52 percent) do not believe uncertainty is causing such delays.
  • 58 percent of managers believe the rising popularity of passive investments has changed financial market behavior. About one-quarter of those have adjusted their investment processes, including liquidity and trading practices, to address the change. 
  • As higher-yielding investments draw strong flows, managers ranked global real estate investment trusts (REITs) as the most overvalued asset class, followed by higher-yielding stocks and global listed infrastructure. The least overvalued sectors were emerging market debt, high-yield bonds and master limited partnerships (MLPs).

For its survey, Northern Trust polls investment firms that participate in its multi-manager investment programs and funds. The select group of respondents includes fixed income and equity managers across value and growth styles, with a bias toward fundamental, bottom-up stock picking strategies. 

Northern Trust Asset Management is a global asset management firm serving institutional and individual investors in 29 countries, with $906 billion in assets under management as of June 30, 2016. It’s parent, Northern Trust Corporation, was founded in Chicago in 1889 and now has assets under custody of $6.1 trillion and AUM of $875 billion.

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