Bulls Become a Little More Bearish | Chief Investment Officer

Northern Trust's investment management report finds investor sentiment has calmed in the second quarter of 2013, and volatility is expected to rise.

(July 15, 2013) — Global investment managers remain broadly positive about the economic outlook, but the bullish feelings about the US from the first quarter have waned, according to a Northern Trust survey.

The financial firm quizzed 100 investment managers on their views of the macro-economic climate and how different geographical sectors were set to perform, and found sentiment on the US had fallen slightly.

While most believed the US house prices, employment figures and economic growth would all improve over the next three to six months, fewer believed we will see an accelerated improvement, opting for slow, measured progress instead.

In addition, 62% of investment managers believe US interest rates will rise over the next quarter, and a change in the Fed’s quantitative easing policy is considered the biggest risk to equities over the next six months.

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One knock-on effect of this is that almost two-thirds (63%) of managers believe market volatility, as measured by the Chicago Board Options Exchange’s Volatility Index (VIX), will increase over the next six months, up from 49% in the last quarter.

Despite this, there remains a strong sense of optimism for the US market, with 77% of managers believing US equities are appropriately or undervalued at present.

Investor sentiment on Europe has vastly improved over the last quarter: In March just 36% of managers believed European equities were undervalued but by July that figure had risen to 59%. Just 9% of managers believed European equities were over-valued, down from 26% last quarter.

And the European debt crisis is no longer the top concern for investment managers, falling to the fifth-ranked concern in July. The top issues posing risk to equity markets are now:

1) The changing US monetary policy/QE tapering

2) Rising US interest rates

3) US economic slowdown

4) US corporate earnings decline

The improvement in feeling around US and European equities has tempered passions for emerging markets. Managers were almost evenly split, with 51% thinking emerging market equities would outperform developed equities, and 49% disagreeing.

With Japan, just 48% believed the policies introduced by Prime Minister Shinzo Abe would help the Japanese economy. Indeed, 40% of managers were “uncertain” about whether the policies would hurt global trade, with another 17% believing damage to global trade was likely.

In terms of asset classes, investment managers were increasingly bearish on bonds, with the Barclays Capital Aggregate Bond Index ranking the lowest. US large and small caps were most popular.

And when considering industry sectors, defensive stocks such as utilities and telecoms languished at the bottom of the table, with information technology, consumer discretionary and industrials offering a positive outlook.

Financials had the most improved outlook, recording a 56% bullish outlook, compared to 51% in the last quarter.

(July 11, 2013) - The well-established portfolio management trends of investment outsourcing and alternatives may be drifting towards the insurance industry.

More than three-quarters (81%) of the 307 insurance executives surveyed for State Street's latest sector report were considering increasing their allocation to alternative investment strategies, in the short or long term. Nearly half (49%) said they were evaluating for action within the next 12 months.

"With policy orders on the life side for which the yield is above 3%, and when 10-year bonds are below 2%, it is very difficult," AXA Investment Management CIO Laurent Clamagirand told State Street. "When yields were big enough, we had a large enough source of assets not to bother. Now we need to diversify big time."

Clamagirand estimated that between 20% and 25% of AXA's new investments would go into nontraditional assets this year. To make room in the insurance giant's risk budget, he reported reducing the already-modest equity holdings.

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As survey respondents considered these new asset classes, 67% said they were looking at increasing the portion of their firm's general account under external management. Still, upping the portion of outsourced assets was not synonymous with hiring more managers: half of the respondents to the April 2013 survey were considering reducing their total number of outside relationships.

The survey garnered responses from insurance executives and senior managers in the Americas (26%), EMEA regions (38%), and Asia/Pacific (36%). Industry subsectors represented include life insurance (53%), health (9%), and reinsurance (7%).