Survey Shows Optimism About Growth and Inflation, Waning Confidence in Emerging Markets

(January 14, 2011) — A survey by Northern Trust has shown that institutional investment managers see growth and inflation ahead, as they are increasingly cautious about emerging market equities.

The survey of approximately 97 institutional managers for the fourth quarter of 2010 indicated that as global growth speeds up and corporate earnings rise, managers remain positive about market fluctuations. A total of 58% of managers said the US equity market is undervalued, with 55% of managers stating that Japanese equities are undervalued.

“Our managers are continuing to find investment opportunities throughout the US and International markets,” said Harry Phinney, NTGA Investment Analyst, in a statement. “However, with regard to emerging market equities, it appears that the recent strong relative performance in the segment may be boosting valuations to levels that our managers feel are somewhat less compelling when compared to other markets.”

Among the most attractive market segments cited by investment managers: technology, energy, consumer discretionary, emerging markets and healthcare .

Furthermore, the study showed 62% of managers believe global inflation will spike over the next six months, which is up approximately 40 percentage points from the third quarter survey and is the highest level recorded since Northern Trust began its survey in the fourth quarter of 2008. Also the highest level recorded since the survey’s inception — 53% of managers believe that interest rates will rise over the next three months, up from 20 percent in the third quarter of 2010.

Meanwhile, the study revealed that in regards to the US Federal Reserve’s second round of quantitative easing, 52% of managers expect the Fed’s program will positively influence the US economy.

Respondents to Northern Trust’s quarterly survey included fixed income and equity managers with a bias toward fundamental, bottom-up stock picking strategies.