Investment managers weigh in on the direction of the markets
This quarter’s Investment Manager Outlook survey produced interesting results. Most notably, bullishness for emerging markets equities fell 20 percentage points, down to 51%. While this indicates that the majority of managers still like emerging markets, this is the lowest rating this asset class has seen since the first quarter of 2009.
There are several issues that are playing into the diminished outlook for emerging markets:
- The unrest in the Middle East has made managers more uncertain about the outlook for this asset class
- Global food prices have spiked and were at record highs at the end of 2010
- Over the first quarter of 2011, unrest spread from Tunisia to Egypt and now to Libya
At the same time, emerging markets have had a strong run, returning 23% for the one year ending February 28, 2011. Managers looked at the strong returns for the asset class, coupled with the uncertain outlook and used the opportunity to take profits and deploy them elsewhere.
One area that saw a jump in bullishness was the financial services sector. This sector saw a 10 percentage point increase in bullishness, and now 49% of managers see this sector as attractive. While many sectors currently seem to be fairly valued, financial services is one sector where many managers are still finding undervalued stocks. Stocks within this sector had been extremely beaten down during the global financial crisis and investors were steering clear due to uncertainty around the severity of loan losses and mortgage delinquencies. In the first quarter of 2009, 47% of managers were bearish on the financial services sector. Now that managers are seeing many banks pay off their TARP loans and issue dividends, sentiment for the sector is improving.
Technology was the most bullish sector once again this quarter, with 74% of managers bullish. This makes technology the top sector in the survey results for the past two years. Within the technology sector, managers are favoring the computer software, communications and semi-conductor industries.
It is important to note that this survey was conducted in the first two weeks of March, prior to the devastating earthquake and tsunami in Japan. We speculate that if we had conducted the survey after that event, we would have seen slightly different results, including additional bearishness for non-U.S. developed markets. Though Japan only comprises 18% of the Russell Developed ex-U.S. Index, in the days following the tsunami there was a macro-economic reaction as the potential nuclear situation caused market turmoil. Additionally, we may have seen an increase in interest in the producer durables and materials and processing sectors, which include heavy machinery and building material stocks that could actually benefit from the cleanup and rebuilding efforts in Japan.