Survey: Investment managers see double-dip recession unlikely

Institutional investment managers' expectations for global growth improved in the third quarter and more than two-thirds of those surveyed believe a double-dip recession is unlikely, according to a quarterly survey conducted by Northern Trust Global Advisors.

Managers also were broadly optimistic that U.S. unemployment would ease in the next six months and that the financial markets would react favorably to a November election that shifts the balance of power in Congress.

“Our third quarter survey revealed some subtle but encouraging shifts in manager sentiment. The most notable trend is toward a sense of stabilization within equity markets, as well as an uptick in global growth expectations, Chris Vella, NTGA global director of research, said in a statement. “As evidence of improvement in the macro environment, most managers also appear confident that a double-dip recession is unlikely.

The question on the likelihood of a return to economic recession was one of three topical questions in the third-quarter survey by NTGA, the multi-manager arm of Northern Trust Corp. that is based in Chicago. The 83 respondents, all of whom participate in NTGA's external manager platform, also were asked for their views on unemployment and the impact of congressional elections in the quarterly poll, taken in mid-September.

“This quarter we wanted to gauge manager views on U.S. unemployment, a key indicator of economic health, and on the upcoming vote for Congress, Harry Phinney, NTGA investment analyst, said in a statement. “Encouragingly, the great majority of managers think that the unemployment rate will decrease over the next six months. Additionally, should the November election result in a change of party control in one or both houses of Congress, more than 80 percent feel that investors will react favorably to the change.

In NTGA's survey, 68 percent of managers believe the U.S. will avoid a double-dip recession and 67 percent of managers expect the unemployment rate to decrease over the next six months. Should voters place Republicans in control of the House or Senate next month, 84 percent of institutional money managers expect investors to react favorably to the change.

These topical views came amid a generally positive outlook in the survey. Three-quarters of managers polled by NTGA expect global growth to accelerate or stay the same over the next six months, up from 63 percent who expressed that view in the second quarter. More than 70 percent of institutional managers believe inflation and interest rates will remain unchanged in the near term, and 61 percent of those polled stated that the U.S. equity market, as measured by the S&P 500 Index, is undervalued.

Other findings include:

Ÿ A growing number of managers (68 percent) are optimistic that corporate earnings will increase in the next three months, a notable increase from 57 percent in the second quarter.

Ÿ Reflecting managers' views of global markets, 58 percent believe emerging markets are undervalued, up from 40 percent in the prior quarter; 43 percent of managers surveyed believe that Japanese equity markets are undervalued, down from 53 percent in the second quarter.

Ÿ Investment managers cited technology, emerging markets, health care, industrials and energy as the top five most attractive market segments. Energy fell in the rankings, while emerging markets and industrials moved up in the quarter.

Ÿ Managers' expectations for global inflation have stabilized, with 71 percent of managers saying they expect inflation to remain the same over the next six months compared to 61 percent in the second quarter. There was an uptick, however, from 19 to 22 percent of managers who expect global inflation to increase over that period.

Ÿ Managers' aversion to risk declined in the third quarter. Only 8 percent of managers stated they are more risk-averse than 3 months ago, down from 31 percent in the second quarter. The number of managers that appear to be satisfied with the risk levels of their portfolio, responding with “no change in risk aversion, increased from 48 percent in the second quarter to 65 percent in the third quarter, the highest level since NTGA began the survey in the fourth quarter of 2008. Managers describing themselves as less risk-averse increased to 27 percent, up from 21 percent in the prior quarter.

Ÿ Similarly, portfolio concentration remained stable for most managers, with 72 percent of managers saying they have made no change to their portfolios' concentration compared to 65 percent in the last survey. Eighty-six percent of managers are within their normal range of cash holdings, up slightly from the second quarter.

Ÿ There were mixed expectations for market volatility, as 9 percent of managers expect the Volatility Index to decrease over the next six months, down from 29 percent that held that view in the second quarter. More than 46 percent believe volatility could increase over that period, up from 43 percent with that view in the last survey, while 45 percent expect volatility to remain stable over the next six months.

For its survey, NTGA polled a select group of respondents, including 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 NTGA and participating managers can examine trends in attitudes and allocations.