Investment managers anticipate a rise in market volatility as the U.S. presidential election approaches, and many expect to modify their portfolios based on the election results, according to a quarterly survey by Northern Trust Asset Management.

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In the survey of approximately 100 investment firms, taken September 2-16, managers view the U.S. economy and corporate earnings as stable and expect the Federal Reserve to increase rates prior to the end of this calendar year.

“Managers highlighted two concerns in this quarter’s survey: Fed policy and the U.S. elections,” said Christopher Vella, Chief Investment Officer for Multi-Manager Solutions at Northern Trust Asset Management. “Despite those concerns, most managers expect U.S. economic growth and corporate earnings to remain steady.”

On the economy, 63 percent of managers expect U.S. gross domestic product (GDP) growth to remain the same over the next six months, up from 49 percent with that view in the prior quarter. Those who expect accelerating growth fell to 29 percent, from 42 percent previously. A larger portion of investment managers expect corporate earnings to remain the same over the next three months – 50 percent, up from 44 percent in the previous quarter.

Nearly half the managers (49 percent) expect housing prices to remain stable, up from 43 percent last quarter, and 48 percent expect housing prices to increase. Most managers surveyed (53 percent) expect inflation will remain the same over the next six months, up from 40 percent with that view the prior quarter. A majority (53 percent) expect interest rates to rise in the next three months, up from 33 percent previously.

Fed Policy and U.S. Elections

The vast majority, 87 percent of managers, correctly predicted that the Federal Open Market Committee would not raise rates at its September meeting. Yet 71 percent expect a Fed rate increase prior to the end of the calendar year. Managers ranked a change in U.S. monetary policy as the top risk to global equity markets, with a rise in interest rates ranked second, U.S. corporate earnings third and the U.S. presidential election fourth.

Expectations of market volatility are at near-record levels, with 78 percent of managers predicting an increase in volatility over the next six months. This was the second highest reading since Northern Trust’s first survey of investment managers, in the third quarter of 2008. On a related topical question, 89 percent of investment managers expect the approach of the U.S. elections on Nov. 8 to generate an increase in market volatility.

Asked to predict which of three U.S. election outcomes would have the biggest impact on global equity markets, 72 percent of managers said a victory by Republican presidential candidate Donald Trump would have the most impact, while 27 percent cited the Democrats winning a majority of seats in the U.S. House of Representatives, and only 1.4 percent cited Hillary Clinton’s election as president.

While 54 percent of managers do not expect to change their portfolios based on the election outcome, nearly one in four (24 percent) expect to change some specific security positions, another 15 percent may have to make sector or geographic allocation changes, and 8 percent may change the risk aversion in their portfolios.

Portfolio Positioning and Equity Valuations

U.S. equities viewed as overvalued by 48 percent of managers, an all-time high, while those who see U.S. equities as undervalued dropped to a historic low of 13 percent. European equities are seen as overvalued by 21 percent of managers, up from 13 percent in the previous quarter. Only 10 percent of managers believe emerging market equities are overvalued, down from 18 percent in the prior quarter.

A relatively large portion of managers, 23 percent, are holding cash levels above their historic norms. This ties the highest reading in previous surveys. In another sign of defensiveness, only 6 percent of managers have become less risk averse over the past three months – an all-time low for the survey. At the same time, 23 percent of managers increased commodities exposure in the second quarter, a relatively high percentage. Nine percent reduced allocation to commodities, an all-time low.

“Although managers are concerned about valuations they are still investing where they see opportunities,” said Mark Meisel, Senior Investment Product Manager for Multi-Manager Solutions at Northern Trust Asset Management. “As the commodity markets seemed to have bottomed, a number of managers have increased their allocations to commodities.”

On the survey’s Bull-Bear Indicator, managers are most bullish on emerging market equities and U.S. small cap and the information technology and health care sectors. Investment managers are most bearish on U.S. fixed income, followed by non-U.S. bonds and the utility and telecommunication services sectors.

For its survey, Northern Trust polls investment firms that participate in its multi-manager investment programs and funds. The select group of respondents includes fixed income and equity managers across value and growth styles, with a bias toward fundamental, bottom-up stock picking strategies. The survey is conducted quarterly so that Northern Trust and participating managers can examine trends in attitudes and allocations. The full Investment Manager Survey Report and a video on survey highlights can be found on Northern Trust’s web site at www.northerntrust.com/managersurvey.

Northern Trust Asset Management is a leading global asset management firm serving institutional and individual investors in 29 countries, with $946 billion in assets under management as of September 30, 2016. Northern Trust Asset Management’s robust investment capabilities span all markets and asset classes, from passive and risk-factor to fundamental active and multi-manager strategies, delivered in multiple vehicles. For more information, please visit our website or follow us on Twitter @NTInvest.

Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, 50 South Capital Advisors, LLC, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc. and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has offices in the United States in 19 states and Washington, D.C., and 22 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of September 30, 2016, Northern Trust had assets under custody of US$6.7 trillion, and assets under management of US$946 billion. For more than 125 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit northerntrust.com or follow us on Twitter @NorthernTrust.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at https://www.northerntrust.com/disclosures.