Institutional Investment Managers Expect Volatility and Growth

April 7, 2010 ( - Institutional investment managers are anticipating increased market volatility and higher interest rates, but remain bullish on corporate profits and global economic growth in the near term, according to a quarterly survey conducted by Northern Trust Global Advisors (NTGA).

NTGA said an overall positive outlook in the first quarter 2010 survey is consistent with the views expressed by managers at the end of 2009, including the perception by nearly half (46%) of managers that the U.S. equity market, as measured by the S&P 500 Index, remains undervalued – more than twice the number who said it is overvalued (20%).   

A solid majority (61%) still expect global growth to accelerate in the next six months.  Select areas of international markets are also seen to be attractive. The majority (53%) of managers now believe that the Japanese equity market is undervalued while 32% believe emerging markets are undervalued.

According to a press release, for the first time since NTGA began its survey in the fourth quarter of 2008, a majority of managers (51%) expect market volatility, as measured by the Volatility Index (VIX), to increase over the next six months.  This is a meaningful shift from fourth quarter, where the majority expected volatility to stabilize over the next six months, NTGA said.  

However, the majority of managers (55%) stated that they have had no change in risk aversion and 78% made no changes to the concentration of their portfolio.  Similarly, 79% of managers are within their normal range of cash holdings. There was evidence that some managers increased their cash positions this quarter as 11% responded they are above their normal cash range, compared to 1% last quarter.

A growing number of managers are anticipating an increase in interest rates over the next quarter.  About one in three (32%) managers surveyed expect interest rates to rise, compared to one in five (21%) last quarter; while 66% anticipate no change in that period.

Additional survey results include:

  • 91% of managers stated they expect merger and acquisition activity to increase over the next six months.
  • The percentage of managers who expect global growth levels to remain the same rose to 28%, from 22% last quarter.
  • The outlook for corporate earnings is increasingly positive with 87% of managers expecting profits to increase in the second quarter of 2010, up from 84% in the fourth quarter.
  • In the first quarter, 61% of mangers believed the risk of commercial real estate prices falling remained the same compared to last quarter.  In the fourth quarter, 44% of managers shared this belief.
  • Global inflation expectations were steady, with 46% of managers saying they expect increased inflation in the next six months. The majority of managers (51%) predict that global inflation will remain the same.
  • Investment managers cited technology, health care, energy, consumer discretionary, and industrials as the top five most attractive market segments.  Emerging markets slipped out of the top five, while industrials moved up in the rankings.

The survey of more than 90 institutional managers was conducted by NTGA, the multi-manager arm of Northern Trust Corp., in mid-March.