Panic or opportunity? Money managers weigh in

September 29, 2011 Categories: Economic Insights
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Each quarter, we ask a group of investment managers for their outlook on the direction of the markets, sectors and asset classes to watch, and trends on the horizon that could impact investment strategy – and bring those to you in the Investment Manager Outlook.

Based on the number of phone calls you’re likely getting each day from worried clients, you might be surprised to hear that the latest survey shows that managers are feeling fairly optimistic – which highlights an interesting paradox: Do professional money managers see opportunity where many investors see reason to panic?

Managers say no to double-dip, growth to remain low

One headline we’ve all seen recently is the fear of a double-dip recession. Yet in the latest survey, 79% of money managers said they are not expecting a double-dip recession in the United States. Most managers agree that strong corporate balance sheets and high profit levels are indicators that the health of the U.S. economy is stronger than some of the headlines might indicate.

Though they do not appear to see a recession coming, 62% of this majority group of managers indicated that they expect growth to remain low for the next several years.

While we believe managers’ expectations for low economic growth are realistic, the collective bullish sentiment and their views on market valuations indicate that they saw a buying opportunity in the equity markets.

Market volatility remains a dominant issue

In further support of this view, 57% of managers said they viewed the markets as undervalued in the latest survey, a big jump from our June 2011 IMO when most managers saw markets as being fairly valued.

The latest IMO survey was conducted between the end of August and beginning of September, when many managers were clearly considering the market impact of the U.S. debt ceiling and downgrade issues and the ongoing European sovereign debt crisis. Since that time, there has been increased nervousness about the European debt crisis and possible global contagion.

While Russell agrees with the majority of the managers surveyed and believes that the U.S. will avoid a recession, the uncertainty around how the European debt issue will ultimately be solved has caused market volatility to increase.  We believe this is currently the dominant issue in the market and see it as the greatest threat to market stability.

Managers see opportunity in “risk on” trade

Managers were most optimistic on their outlook for emerging market equities, with 74% of managers bullish on the asset class.  At the same time, bullishness for non-U.S. developed markets fell to 45%.  Though emerging markets have historically been seen as a “risky” asset class, many managers are likely seeing emerging markets as an attractive alternative given the recent weakness in the U.S. and the brewing debt crisis in Europe.

It was interesting to see that managers indicated a preference for assets such as emerging market equities, equities instead of bonds and pro-growth U.S. equity sectors, especially since the markets have recently been rewarding “risk-off” positioning. It’s another good reminder that what may appear to investors as reason to flee may in fact be an opportunity.

Like advisors, professional money managers are often able to look beyond short-term issues toward    long-term possibilities – and as we saw in the recent Financial Professional Outlook, many of you believe that the primary way you add value for clients is by helping them to maintain perspective when market events might ring the panic alarm.

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