Despite the long-running spate of bad economic news, over three quarters of investment managers surveyed say they don't see the US. economy entering a double-dip recession, according to Russell Investments.
When this subset of managers was asked what economic indicators support this optimistic view, 78% cited strong corporate balance sheets and high corporate profit levels and 49% pointed to the U.S. Federal Reserve's decision to keep interest rates low until mid-2013, according to the Investment Manager Outlook report, which Russell released today.
The report is a quarterly survey of U.S. senior-level investment decision makers at equity investment management firms as well as at fixed-income investment management firms. The current survey was conducted between Aug. 23 and Sept. 2.
Other economic indicators speaking against another recession, according to surveyed managers, include declining oil prices and U.S. dollar weakness. While they do not see a recession coming, 62% of this majority group indicated that they do expect growth to remain low for the next several years.
"We have seen a consistent spate of negative economic news that has certainly impacted investors' confidence in the markets and we continue to see notable volatility," said Rachel Carroll, client portfolio manager at Russell Investments. "Yet among professional money managers, we are seeing a focus on fundamentals such as strong corporate profits that is supporting an overall bullish sentiment, particularly for large-cap U.S. corporate stocks."
While managers' low expectations for overall economic growth are realistic, their collective sentiment and views on market valuations indicate that "they see a buying opportunity in the equity markets," Carroll said.
Among managers who believe the U.S. economy is entering or already in a double-dip recession, 95% cited a recovery in employment levels as the key requirement for either avoiding or leading the U.S. out of recession. An estimated 45% of this group pointed to the need for improved consumer confidence/consumption, while 40% cited resolution of both the U.S. and European debt issues as key recovery factors.
About 57% of the managers surveyed said the market is currently undervalued-more than double the percentage of managers who felt that way in Russell's June survey. Only 10% of managers currently believe the market is overvalued, and 32% believe it is fairly valued, down from 61% in June.
Manager optimism regarding U.S. large-cap equities increased in the latest survey, likely reflecting their views on opportunities in the equity markets, according to Russell. Bullish sentiment for U.S. large-cap growth stocks increased 13 percentage points from the June survey to 73%, and bullishness for U.S. large-cap value stocks hit an all-time survey high of 63%, up 14 percentage points from June.
Bullishness for emerging market equities also saw a notable increase in the latest survey, reaching an all-time survey high of 74%, up 15 percentage points from June. Over the same period, bullishness for non-U.S. developed market equities fell eight percentage points to 45%.
"At the time of the survey, many managers were clearly considering the market impact of the U.S. debt ceiling and downgrade issues and the ongoing European sovereign debt crisis," Carroll said. "And likely they see the emerging markets as a comparatively stable option based on steady growth rates and an expanding consumer base."
-Jim McConville