Russell survey: Most managers unconcerned about end of QE2 but optimism tempered for U.S. equities and bonds
Seattle, WA — — Three quarters (75 percent) of investment managers surveyed in the latest Investment Manager Outlook (IMO), a quarterly survey conducted by Russell Investments, say that they are not concerned about the scheduled conclusion of the U.S. Federal Reserve’s second round of quantitative easing (QE2).
More than half of the survey respondents (54 percent) indicated that they believe the end of QE2 will have no impact because the financial markets have already priced in this event, and 21 percent said there will be no negative effects because the economic recovery in the U.S. is self-sustaining.
Despite this apparent confidence around the end of QE2, manager optimism regarding U.S. equities and bonds fell across the board in the latest IMO survey, trending toward survey average levels. Bullish sentiment for U.S. large cap growth stocks dropped from 70 percent in March 2011 to 60 percent in June, and managers remained bearish regarding U.S. corporate bonds (eight percentage point increase in bearishness since March to 57 percent) and U.S. Treasuries (two percentage point increase in bearishness since March to 82 percent).
After a 20 percentage point tumble in bullish sentiment in the March survey, bullishness for emerging market equities increased in the latest survey, up eight percentage points from March to 59 percent. Bullishness for non-U.S. (developed market) equities also rose four percentage points from March to 53 percent.
“Managers may not be citing concern about the end of QE2 specifically, but they certainly appear uneasy about the U.S. economic environment overall, and they are showing caution and moving toward a more defensive investment posture,” said Rachel Carroll, client portfolio manager at Russell Investments. “Recent U.S. economic data, including the unexpected increase in unemployment numbers, challenged previously held growth-rate expectations, and this quarter’s growth in optimism for non-U.S. and emerging market equities is an indicator of increased nervousness related to the path of the U.S. economic recovery.”
With respect to concern about QE2’s conclusion, 19 percent of the managers surveyed say they believe the economy is still weak and the end of QE2 will be harmful to capital spending and employment. Fifteen (15) percent believe the end of QE2 will require the Fed to raise the federal funds rate before the end of 2011 to keep inflation in check and 10 percent believe the end of QE2 will derail the economic recovery.
Russell’s chief economist, Mike Dueker, recently shared his views on the end of QE2 on Russell’s Helping Advisors blog.
Russell’s Investment Manager Outlook is an ongoing survey intended to generate a meaningful snapshot of investment manager sentiment each quarter. For the current installment of the survey, Russell collected the opinions of U.S. senior-level investment decision makers at equity investment management firms as well as at fixed-income investment management firms. Additional findings from the latest Investment Manager Outlook include:
Managers continue to see markets as fairly valued
In the latest survey, the majority of managers (61 percent) see the U.S. equity market as fairly valued, representing a drop of 11 percentage points from the all-time survey high in March at 72 percent. Currently, 26 percent of respondents believe the market is undervalued and 13 percent believe the market is overvalued.
Manager nervousness regarding overall strength of the economy appears to have affected sentiment across several industries
Bullishness for the “safe haven” consumer staples sector rose eight percentage points since last quarter to 40 percent in the latest survey.
The financial services sector also saw a 10 percentage point increase in bearishness and according to Carroll, “If investors are worried that the economy is slowing, then financials may seem too risky. The ongoing uncertainty regarding loan losses and the changing regulatory environment for financial companies is likely weighing on this outlook. Additionally, the April earnings season was not particularly strong for many financial companies, which could have had a negative impact on bullish sentiment.”
Bullishness for the energy sector dropped 14 percentage points from March to June, against a backdrop of falling oil prices and nervousness about a potential economic pullback. Of note, the energy sector of the Russell 1000 Index® had the strongest one-year returns of any sector through May 2011, but has been one of the worst performers recently, down approximately 10.5 percent since the end of April 2011.
“Managers’ bullishness for the energy sector seems to be dwindling after seeing strong gains through the first quarter of the year,” said Carroll. “Though this has been an area of strength in the market, and we believe that there are many growth drivers going forward, it is also an area of uncertainty. Managers may be moving away from energy and toward traditionally defensive sectors such as consumer staples and utilities in anticipation of a potential economic pullback.”
The technology sector saw a nine percentage point drop in bullishness quarter-over-quarter, and a four percentage point drop year-over-year. That said, this sector continues to lead all sectors – for the tenth survey in a row – in terms of bullishness, with 65 percent of managers expressing bullish sentiment.
About Investment Manager Outlook
Prior to the end of each quarter, Russell polls a sample of investment managers to collect top-line opinions about their outlook for the direction of the markets, sectors and asset classes to watch, and trends on the horizon that could impact investment strategy. In addition to the quantitative results, the Investment Manager Outlook provides qualitative analysis and commentary from one of Russell’s senior investment strategists.
As a leader in multi-manager investing and the creator of the Russell Indexes, Russell Investments seeks to understand capital markets and identify investment managers it believes have exceptional capabilities. To achieve these goals, Russell’s analysts hold more than 3,000 research meetings each year with investment managers around the world. The cumulative knowledge gained from this unparalleled access to senior-level investment decision makers serves as the foundation for all of Russell’s products and services.
About Russell Investments
Founded in 1936, Russell Investments is a global financial services firm that serves institutional investors, financial advisors and individuals in more than 35 countries. Over the course of its history, Russell’s innovations have come to define many of the practices that are standard in the investment world today, and have earned the company a reputation for excellence and leadership. The firm has $161 billion in assets under management (as of 3/31/11). For more information about how Russell helps to improve financial security for people, visit us at www.russell.com.
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