This occurred as positive expectations for housing, jobs and corporate profits outweighed concerns about the impact of across-the-board federal budget cuts that went into effect on March 1. A majority of the approximately 100 investment managers surveyed in mid-March expect the automatic budget cuts to remain in place through the end of the quarter. More than one in three (37%) believe federal spending reductions will have a negative impact on U.S. equity markets.

However, 56% said sequestration would have a neutral impact on markets, and the vast majority of investment managers (96%) forecast that the economic effects will either be in line with or less severe than current economic forecasts of a 1% reduction or less in U.S. gross domestic product (GDP).

The survey found investment managers were increasingly optimistic about U.S. economic fundamentals: 

• 88% expect housing prices to increase over the next six months, the highest reading since the survey began in the third quarter of 2008;
• 91% see corporate earnings either remaining the same or increasing over the next three months, while only 9% expect profits to decline. This is down from 32% who had a negative view in the fourth quarter of 2012;
• 38% expect job growth to accelerate in the next six months, up from 27% who had that view at the end of 2012; and
• 46% say U.S. economic growth will accelerate over the next six months, up from 33% with that view in the fourth quarter. Only 11% think GDP growth will slow over the next six months, down from 21% last quarter.

“Investment managers appear to be looking past Washington’s budgetary gridlock and expect the economy to continue to improve,” said Chris Vella, chief investment officer for Northern Trust Multi-Manager Investments. “The positive sentiment of the managers surveyed over the past few quarters gives perspective to the stock market’s recent gains. Manager expectations for key economic indicators provides a basis of support for the highs reached by U.S. equity indexes.”

(Cont’d…)

The first quarter survey found some reason for caution, however, as more managers saw the U.S. equity markets becoming fully valued and anticipated that economic growth could push the Federal Reserve to raise interest rates. Twenty-eight percent of managers said the S&P 500 Index was overvalued – more than double the number who held that view in the previous quarter. Those who believe the S&P 500 is undervalued fell to 37% – down from 50% in the previous quarter. On interest rates, 35% of managers expect an increase in the next three months – double the amount as in the fourth quarter of 2012. Managers also ranked a change in the Federal Reserve's monetary policy as the number-two risk to equities, just behind the European debt crisis.

“These caution flags are not surprising, given the recent strong performance in equities that has pushed market indexes to new highs,” said Mark Meisel, senior investment product specialist of the Multi-Manager Investments group, who oversees the survey. “While they are monitoring these potential headwinds, however, managers continue to identify investment opportunities in U.S. equities, as well as Japan and the emerging markets.”

Other findings of the survey include:

• 57% of managers believe the Japanese equity market is undervalued, up from 45% who had that view in the previous survey;
• 62% are bullish on emerging market equities, up from 59% last quarter;
• 64% report a bullish outlook on the U.S. industrial sector, up from 52% last quarter; and
• 58% are bullish on U.S. small caps, up from 50% last quarter.

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.

For more details, please see the full Northern Trust Investment Manager Survey Report at http://www.northerntrust.com/managersurvey.