Fed tapering is bigger risk to equities than European sovereign debt crisis, say asset managers
The possibility of changes to the US Federal Reserve’s policy of quantitative easing represent the biggest risk to equity markets for the remainder of 2013, overtaking fears presented by the European sovereign debt crisis in the first half of the year, according to a survey of asset managers conducted by investment solutions provider Northern Trust.
Sixty-two percent of asset managers predict interest rates will rise in the third quarter due to statements by Fed chairman Ben Bernanke that the institution may slow its bond purchases, while 63 percent believe market volatility will increase at the same time.
The survey of 100 asset managers was taken between June 6 and June 21. On June 19, Bernanke said the Fed may taper its monthly purchases of $85 bn in bonds later this year and end the program sometime next year if certain macroeconomic targets are met.
Asset managers are also less optimistic about improvements in US economic prospects in the second half than they were in the first half, with 76 percent expecting higher housing prices, down from 88 percent in the earlier survey, and 29 percent predicting accelerating job growth, down from 38 percent in a survey in the first quarter of the year.
‘Monetary policy announcements in the US have led to increased volatility in equity markets,’ says Chris Vella, chief investment officer for the Northern Trust multi-manager solutions group, in a press release. ‘Despite this volatility, most of our managers have a positive view on key economic indicators in the US, which may be why they continue to have supportive views on the US equity market’s current valuation.’
Most asset managers also say stocks are undervalued in North America and Europe. Seventy-seven percent say the S&P 500 is undervalued, up from 73 percent in the first quarter survey, while the number stating that European equities are undervalued has risen to 59 percent from 36 percent.
The number that see the Japanese equities market as overvalued has increased to 33 percent from 17 percent, while 48 percent predict the economic reform program of Japan’s Prime Minister Shinzo Abe will benefit the economy. Managers are split on whether emerging markets will outperform developed markets in the second half, with 51 percent saying they will and 49 percent predicting they won’t.
‘The valuation assessments of the various equity regions by investment managers reflect a fair amount of changes from the previous quarter,’ says Mark Meisel, senior investment product specialist of the Northern Trust multi-manager solutions group. ‘This was probably due to the volatile and varied performance among the regions, with the US equity market up just under 14 percent through June, emerging market equities down nearly 10 percent, European equities flat and Japanese equities up over 15 percent on a US dollar basis.’
