Northern Trust: Money Managers Wary of Geopolitical Risk, US Slowdown

Many see US equity valuations as stretched, and emerging markets offering the most opportunities in the next few years.

The market may be becoming too complacent, based on measures such as the Chicago Board Options Exchange Volatility Index, according to a second-quarter survey of investment managers by Northern Trust Asset Management. This leads 63% of the 100 survey respondents to be cautious about a possible market selloff.

In addition, many of these investment managers see US equity valuations as stretched, according to the Chicago-based asset management firm, with only 36% of respondents believing that equities are undervalued or fairly valued, the lowest level ever since Northern Trust initiated this survey in 2008. Many, at 86%, see European equities as undervalued or fairly valued, and 88% believe the same of emerging market equity valuations.

“Although managers view US equity valuations as extended, fundamentals—GDP growth, low inflation and earnings growth—are still favorable,” said Christopher Vella, chief investment officer for multi-manager solutions at Northern Trust Asset Management. “Even though survey respondents over the past few quarters have been increasingly less positive on US equity valuations, the US equity market has been resilient and has provided good returns.”

As for the biggest risks to the world equity markets looking ahead, geopolitical risks headed up the list, followed by the possibility of economic slowdown in the US, and US corporate earnings. Trade policy tapered off to risk number four, from its previous top position.

US economic growth will remain stable, according to 60% of the respondents, while 29% expect that growth will pick up, down from 44%. More managers, at 50%, expect corporate earnings to rise, up from 46%. However, there has been a drop  in expectations for interest rate hikes and inflation pickup, with 66% anticipating the former, down from 79%, and 42% anticipating an inflation rise, down from 63%.

And only 43% of these investment professionals are wary about fallout from trade wars between the US and its trading partners that could impact financial markets. As for the impact of the Trump administration’s plans to roll back the post-financial crisis rulemaking, 49% reported that their costs were up only modestly as a result of addressing such requirements.

Of the various US industry sectors, only 39% see financials as undervalued, and 32% each believe this of the energy and healthcare sectors. Only 15% see the information technology sector as undervalued.

Respondents also see emerging markets India, China, and Brazil as offering the most investment opportunities in the next few years, followed by non-US developed equities, with frontier markets Russia and South Africa offering the least opportunities.

They remain bullish on US small-cap equities, while being most bearish on US fixed income, followed by hedge funds and commodities.

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