Northern Trust Survey: Optimism Rises as Investment Managers Look Ahead to U.S. Policy Changes

Investment managers are more optimistic regarding the U.S. economy's prospects and corporate earnings as the Trump administration and Republican-controlled Congress take office, according to the quarterly Investment Manager Survey by Northern Trust Asset Management.

A corporate tax rate cut, personal income tax rate cut and minor changes to the Affordable Care Act (also known as Obamacare) are the policy items most likely to move forward in 2017 under new U.S. leadership, according to the survey of approximately 100 investment firms taken December 9-20, 2016. An infrastructure spending plan ranked just below these top three policies, repatriation of off-shore taxes was fifth and significant regulation roll-back was sixth.

'Since the November election, investors have been trying to assess what new policies may come out of Washington D.C., and their potential effect on the economy and financial markets,' said Christopher Vella, Chief Investment Officer for Multi-Manager Solutions at Northern Trust Asset Management. 'Our survey respondents expect pro-growth initiatives to prevail in the next year, and assign the lowest probability to trade tariffs, significant immigration policy reform, and a repeal or significant changes to the Affordable Care Act.'

The portion of investment managers that expect the U.S. economy to accelerate over the next six months increased dramatically, to 55 percent from 29 percent in the previous quarter. Managers also displayed a surge of optimism on U.S. corporate earnings: 62 percent of managers expect earnings to increase over the next three months, up from 33 percent in the previous quarter. Managers were a bit more optimistic about U.S. job growth: 17 percent of managers believe job growth will increase in the next six months, compared to 7 percent in the previous quarter.

Inflation expectations rose with the growth forecast: 78 percent of managers expect inflation will increase over the next six months, up from 47 percent the previous quarter - and the highest percentage charted since Northern Trust's first survey in the third quarter of 2008. Despite this outlook, 81 percent of investment managers expect the Federal Reserve to raise interest rates only once or twice in 2017.

Investment Risks and Portfolio Positioning
Investment managers ranked trade policy as the top risk to global equity markets. A rise in interest rates ranked second, as it was the prior quarter, and geopolitical risk ranked third, up from seventh in the previous survey. Trade policy was added to the list of potential risks to equities for the first time this quarter after it became a central issue in the presidential election.

Eighteen percent of investment managers, down from a historically high 23 percent in the previous quarter, have cash levels in their portfolios that are above their normal cash target. This suggests a sizeable minority of managers are slightly defensive in their portfolios' positioning. A slightly larger number of managers have become more risk averse this quarter: 31 percent compared to 28 percent previously. At the same time, divergent views among managers were apparent, as 21 percent of managers said they are less risk averse, up from 6 percent who were less risk averse in the previous quarter.

Over the past six quarters, more managers have been increasing exposure to commodities, which can act as an inflation hedge. In the fourth quarter, 36 percent of managers increased commodities exposure, the highest level since this question was initially asked in the second quarter of 2010.

Equity Valuations and Opportunities
Equity valuations were seen as most attractive in Emerging Markets, Europe and Japan but improved across geographic markets in the fourth quarter survey. Slightly more managers, 19 percent versus 13 percent in the previous quarter, believe U.S equities are undervalued and fewer view U.S. equities as overvalued - 39 percent versus 48 percent previously. In other markets, 36 percent of managers believe equities in Japan are undervalued, up from 25 percent the prior quarter; 89 percent believe European equities are undervalued or fairly valued, up from 79 percent the previous quarter; 61 percent see emerging market equities as undervalued, comparted to 49 the previous quarter.

'Managers believe valuations improved for all equity regions covered by the survey,' said Mark Meisel, Senior Investment Product Manager for Multi-Manager Solutions at Northern Trust Asset Management 'This may have been influenced by a new pro-growth agenda by the incoming Republican administration.'

Managers are most bullish on U.S. small cap equities, followed by emerging market equities. Commodities jumped to third among asset classes, up from seventh last quarter. Looking at sectors, managers were most bullish on the financial sector, which rose from fifth place previously. Energy improved to second from fourth place.

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.

About Northern Trust Asset Management
Northern Trust is a global asset management firm serving institutional and individual investors in 29 countries, with $942 billion in assets under management as of December 31, 2016. Northern Trust Asset Management offers proprietary and multi-manager solutions across all markets and asset classes, from passive to actively managed 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 December 31, 2016, Northern Trust had assets under custody of US$6.7 trillion, and assets under management of US$942 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.