Survey: Despite Negative Economic Outlook, Institutional Investment Managers See Opportunity in US Equities

(October 24, 2011) — Institutional investment managers are growing increasingly pessimistic about the US economy, but see value in US equity markets, a quarterly survey by Northern Trust has revealed.

The third quarter 2011 Northern Trust Global Advisors (NTGA) manager survey showed that a total of 75% of managers believe US equities are undervalued — US large cap equities were the highest ranked asset class, while technology was the highest ranked sector in the third quarter.

“After what was clearly an incredibly challenging quarter, our managers seem to be saying that although they see plenty of opportunities in the market at current valuations, it’s buyer beware given the considerable headwinds that may be coming our way.” said Christopher Vella, Chief Investment Officer for NTGA, the multi-manager business of Northern Trust.

The study showed that the European debt crisis is perceived to be the biggest risk to equity markets in the next six months. A total of 63% of managers anticipate the European debt crisis will spill over to other areas of the market.

Furthermore, the study showed that while 39% of managers expect corporate earnings to decline in the fourth quarter of 2011 compared to 15% last quarter, 36% of managers expect US GDP growth to decelerate over the next six months, up from 21% in the second quarter. Northern Trust also revealed that investors are holding onto cash, with 23% holding a higher-than-normal level of cash in the third quarter, up from 12% in the previous quarter.

Kelly Finegan, NTGA Investment Analyst, added: “There has been a clear trend in the markets away from more economically sensitive sectors in favor of those that can hold up if the economic indicators and markets continue to be weak…Overall, managers’ outlooks are more negative than 3 months ago, but there is still some optimism and managers feel there are numerous areas of the market that offer attractive investments.”

For its quarterly survey, Northern Trust polled fixed income and equity managers across value and growth styles, with a bias toward fundamental, bottom-up stock picking strategies. The survey of 100 investment firms that participate in Northern Trust’s manager-of-managers program was conducted in late September.