(October 10, 2013) — The US government shutdown has entered day 10, and yet investment managers remain optimistic about American economic growth, a survey has found.
From a survey of 100 institutional managers, Northern Trust revealed that managers believed US growth to be “resilient” regardless of the budget deadlock and the Federal Reserve’s tapering of the quantitative easing program (QE3).
Over 90% of managers expected the battles in Washington to have little impact on the US equity market.
“Regarding the budget standoff, it seems if Washington’s continued infighting was not news to Wall Street, and managers expected that gradual strengthening of key indicators would prevail over short-term political factors,” Chris Vella, Northern Trust’s CIO for multi-manager solutions, said. “Optimism on the economy also appears to outweigh Fed policy changes that have been anticipated by the financial markets.”
The data found that 86% of managers expect job growth to remain stable or increase in the next six months. Almost three-quarters believed housing prices will rise in the same period and 89% expect corporate profits to stay steady or increase in the fourth quarter.
There was also little change in risk management strategies for institutional managers.
More than half of the surveyed managers said there was no change in their portfolios’ risk-aversion than three months ago. One fifth said they’ve become less risk-adverse. Portfolio concentration stayed normal over the last three months for 78% of managers, according to Northern Trust.
“Our outlook has not changed,” Burns McKinney, managing director of NFJ Investment Group, said. “The equity market may pull back if the Fed does move toward the exits, but stocks are not too richly priced. This move would help the financials but would likely hurt the materials and energy stocks.”
Outside the US, managers found value in emerging markets—64% of those surveyed believed emerging market equities were undervalued. However, 23% expect emerging markets to outperform developed markets over the next six months.
Managers largely found European and Japanese markets to be undervalued.
When asked about asset classes, most managers were bullish on US large-cap equities, small caps, and emerging market equities. On the other hand, they were bearish on US fixed income, non-US bonds, and cash.
Mark Meisel, Northern Trust’s senior investment product specialist, said managers mostly focused on change in monetary policy in relation to risk this quarter.
“Most managers are expecting that Washington will sidestep the budget and debt ceiling issues prior to significant harm being inflicted on the markets,” Meisel said.
Although long-term interest rates are expected to rise when the Fed begins tapering the $85 billion monthly bond purchases, managers said the economy would experience limited impact.
Almost two-thirds of respondents said the economy would most likely continue to grow even if the 10-year US Treasury note rate increases to 3.85% or higher.
“The tapering comments provided greater transparency as to how the Fed would handle the easing coupled with stronger economic growth,” Randell Cain, Jr., principal and portfolio manager at Herndon Capital Management, said. “The comments indicated that the Fed would only institute the tapering when the economy showed strength, which should be perceived as a bullish fundamental signal when enacted.”
However, Invesco's Chief Economist John Greenwood said the impact of the government shutdown may be more difficult to estimate than many confident projections imply.
The last time the US government was in a debt ceiling impasse, in 2011, investors were encouraged to sell equities and buy bonds—as a response to expectations of economic damage, or a “growth scare.”
“A similar outcome is entirely possible on this occasion, although the better economic fundamentals of foreign economies make the currency more vulnerable this time,” Greenwood said.
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