Manager Optimism Falls for Equities and Bonds

Bullish sentiment for U.S. large cap growth stocks dropped from 70% in March 2011 to 60% in June, and managers remained bearish regarding U.S. corporate bonds (eight percentage point increase in bearishness since March to 57%) and U.S. Treasuries (two percentage point increase in bearishness since March to 82%).  

After a 20 percentage point tumble in bullish sentiment in the March survey, bullishness for emerging market equities increased in the latest survey, up eight percentage points from March to 59%. Bullishness for non-U.S. (developed market) equities also rose four percentage points from March to 53%.The majority of managers (61%) see the U.S. equity market as fairly valued, representing a drop of 11 percentage points from the all-time survey high in March at 72%. Currently, 26% of respondents believe the market is undervalued and 13% believe the market is overvalued.  

The financial services sector saw a 10 percentage point increase in bearishness. Bullishness for the energy sector dropped 14 percentage points from March to June, against a backdrop of falling oil prices and nervousness about a potential economic pullback. The technology sector saw a nine percentage point drop in bullishness quarter-over-quarter, and a four percentage point drop year-over-year. That said, this sector continues to lead all sectors – for the tenth survey in a row – in terms of bullishness, with 65% of managers expressing bullish sentiment.

Unconcerned about End of QE2  

Three-quarters of investment managers surveyed in the latest Investment Manager Outlook (IMO), a quarterly survey conducted by Russell Investments, say that they are not concerned about the scheduled conclusion of the U.S. Federal Reserve’s second round of quantitative easing (QE2).  

More than half of the survey respondents (54%) indicated that they believe the end of QE2 will have no impact because the financial markets have already priced in this event, and 21% said there will be no negative effects because the economic recovery in the U.S. is self-sustaining.  

With respect to concern about QE2’s conclusion, 19% of the managers surveyed say they believe the economy is still weak and the end of QE2 will be harmful to capital spending and employment. Fifteen percent believe the end of QE2 will require the Fed to raise the federal funds rate before the end of 2011 to keep inflation in check and 10% believe the end of QE2 will derail the economic recovery.  

“Managers may not be citing concern about the end of QE2 specifically, but they certainly appear uneasy about the U.S. economic environment overall, and they are showing caution and moving toward a more defensive investment posture,” said Rachel Carroll, client portfolio manager at Russell Investments.