U.S. elections could lead to portfolio
shifts
Investment managers anticipate a rise in market volatility as
the U.S. presidential election approaches, and many expect to
modify their portfolios based on the election results, according to
a quarterly survey by Northern Trust Asset Management.
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In the survey of approximately 100 investment firms, taken
September 2-16, managers view the U.S. economy and corporate
earnings as stable and expect the Federal Reserve to increase rates
prior to the end of this calendar year.
“Managers highlighted two concerns in this quarter’s survey: Fed
policy and the U.S. elections,” said Christopher Vella, Chief
Investment Officer for Multi-Manager Solutions at Northern Trust
Asset Management. “Despite those concerns, most managers expect
U.S. economic growth and corporate earnings to remain steady.”
On the economy, 63 percent of managers expect U.S. gross
domestic product (GDP) growth to remain the same over the next six
months, up from 49 percent with that view in the prior quarter.
Those who expect accelerating growth fell to 29 percent, from 42
percent previously. A larger portion of investment managers expect
corporate earnings to remain the same over the next three months –
50 percent, up from 44 percent in the previous quarter.
Nearly half the managers (49 percent) expect housing prices to
remain stable, up from 43 percent last quarter, and 48 percent
expect housing prices to increase. Most managers surveyed (53
percent) expect inflation will remain the same over the next six
months, up from 40 percent with that view the prior quarter. A
majority (53 percent) expect interest rates to rise in the next
three months, up from 33 percent previously.
Fed Policy and U.S. Elections
The vast majority, 87 percent of managers, correctly predicted
that the Federal Open Market Committee would not raise rates at its
September meeting. Yet 71 percent expect a Fed rate increase prior
to the end of the calendar year. Managers ranked a change in U.S.
monetary policy as the top risk to global equity markets, with a
rise in interest rates ranked second, U.S. corporate earnings third
and the U.S. presidential election fourth.
Expectations of market volatility are at near-record levels,
with 78 percent of managers predicting an increase in volatility
over the next six months. This was the second highest reading since
Northern Trust’s first survey of investment managers, in the third
quarter of 2008. On a related topical question, 89 percent of
investment managers expect the approach of the U.S. elections on
Nov. 8 to generate an increase in market volatility.
Asked to predict which of three U.S. election outcomes would
have the biggest impact on global equity markets, 72 percent of
managers said a victory by Republican presidential candidate Donald
Trump would have the most impact, while 27 percent cited the
Democrats winning a majority of seats in the U.S. House of
Representatives, and only 1.4 percent cited Hillary Clinton’s
election as president.
While 54 percent of managers do not expect to change their
portfolios based on the election outcome, nearly one in four (24
percent) expect to change some specific security positions, another
15 percent may have to make sector or geographic allocation
changes, and 8 percent may change the risk aversion in their
portfolios.
Portfolio Positioning and Equity Valuations
U.S. equities viewed as overvalued by 48 percent of managers, an
all-time high, while those who see U.S. equities as undervalued
dropped to a historic low of 13 percent. European equities are seen
as overvalued by 21 percent of managers, up from 13 percent in the
previous quarter. Only 10 percent of managers believe emerging
market equities are overvalued, down from 18 percent in the prior
quarter.
A relatively large portion of managers, 23 percent, are holding
cash levels above their historic norms. This ties the highest
reading in previous surveys. In another sign of defensiveness, only
6 percent of managers have become less risk averse over the past
three months – an all-time low for the survey. At the same time, 23
percent of managers increased commodities exposure in the second
quarter, a relatively high percentage. Nine percent reduced
allocation to commodities, an all-time low.
“Although managers are concerned about valuations they are still
investing where they see opportunities,” said Mark Meisel, Senior
Investment Product Manager for Multi-Manager Solutions at Northern
Trust Asset Management. “As the commodity markets seemed to have
bottomed, a number of managers have increased their allocations to
commodities.”
On the survey’s Bull-Bear Indicator, managers are most bullish
on emerging market equities and U.S. small cap and the information
technology and health care sectors. Investment managers are most
bearish on U.S. fixed income, followed by non-U.S. bonds and the
utility and telecommunication services sectors.
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. The survey is
conducted quarterly so that Northern Trust and participating
managers can examine trends in attitudes and allocations. The full
Investment Manager Survey Report and a video on survey highlights
can be found on Northern Trust’s web site at
www.northerntrust.com/managersurvey.
Northern Trust Asset Management is a leading global asset
management firm serving institutional and individual investors in
29 countries, with $946 billion in assets under management as of
September 30, 2016. Northern Trust Asset Management’s robust
investment capabilities span all markets and asset classes, from
passive and risk-factor to fundamental active and multi-manager
strategies, delivered in multiple vehicles. For more information,
please visit our website or follow us on Twitter @NTInvest.
Northern Trust Asset Management is composed of Northern Trust
Investments, Inc., Northern Trust Global Investments Limited, 50
South Capital Advisors, LLC, Northern Trust Global Investments
Japan, K.K., NT Global Advisors, Inc. and investment personnel of
The Northern Trust Company of Hong Kong Limited and The Northern
Trust Company.
About Northern Trust
Northern Trust Corporation (Nasdaq: NTRS) is a leading provider
of wealth management, asset servicing, asset management and banking
to corporations, institutions, affluent families and individuals.
Founded in Chicago in 1889, Northern Trust has offices in the
United States in 19 states and Washington, D.C., and 22
international locations in Canada, Europe, the Middle East and the
Asia-Pacific region. As of September 30, 2016, Northern Trust had
assets under custody of US$6.7 trillion, and assets under
management of US$946 billion. For more than 125 years, Northern
Trust has earned distinction as an industry leader for exceptional
service, financial expertise, integrity and innovation. Visit
northerntrust.com or follow us on Twitter @NorthernTrust.
Northern Trust Corporation, Head Office: 50 South La Salle
Street, Chicago, Illinois 60603 U.S.A., incorporated with limited
liability in the U.S. Global legal and regulatory information can
be found at https://www.northerntrust.com/disclosures.
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Northern Trust CorporationMedia Contact:John O’Connell+1 312 444
2388John_O'Connell@ntrs.comhttp://www.northerntrust.com
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