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Most managers say market’s undervalued

Date: Tuesday, January 20, 2009
Author: The News Tribune.com

Every quarter, Russell Investments surveys a sample of investment decision-makers to collect their opinions about market direction, sectors and styles to watch, and economic trends that could impact investment strategy. The result of this survey is the Investment Manager Outlook (IMO).

Investors have experienced difficult times, and no one can say with certainty what lies ahead. Yet the managers surveyed appear guardedly optimistic about the future. A majority of the 206 managers who responded to the survey believe we may be nearing a bottom. And while they wait for the market to turn bullish, the managers seem to be making the most of the opportunities afforded by this bear market.

In keeping with the considerable volatility that has been a hallmark of the later half of 2008, managers have exhibited a greater range of flexibility in their perceptions. Growing bullishness indicates that they see a bottom forming in spite of great uncertainty expressed in early November after the previous month’s severe market downturn.

The markets are oversold, according to manager observations. De-leveraging to meet liquidity needs – particularly among hedge funds – has reduced valuations below their proper levels, they believe. Seventy-two percent of managers see the market as undervalued versus 20 percent who believe it to be valued fairly.

A majority of managers expressed bullishness in eight of the survey’s 13 asset classes. The previous high for a bullish majority was four asset classes. Record highs for bullishness were set in four asset classes – corporate bonds, U.S. small cap value, U.S. mid cap value and high-yield bonds. Value investing also increased in bullish sentiment. Bearishness slightly outweighed bullishness regarding equities in emerging markets and non-U.S. (developed) markets.

Bonds attracted managers’ attention in increasing numbers – this while 89 percent of managers surveyed were not fixed-income managers. Managers favor defensive sectors and blue-chip-companies with “fortress-like” balance sheets. Health care remains the favorite sector, although bullishness declined slightly.

Managers’ second preference is technology. Many tech companies hold large amounts of cash, and the sector historically has rallied quickly off a market bottom.

Bullishness among managers rose in the financial services sector, as well. Consumer staples, along with consumer discretionary and services, round out the top five sectors.

Managers, retaining faith in the financial system, express a positive outlook for 2009.

Half of those surveyed believe that U.S. equity market performance will go up by 10 percent or more next year. Nearly 27 percent see that performance rising but at less than 10 percent. Twenty three percent of managers believe that the market will not increase.

While the managers believe that the market has more than sufficiently discounted the pain in earnings and stock prices caused by the recession, I would advise caution. The bar may be set low and the managers may expect a considerable early bounce, but the volatility of the markets is massive. The managers see equity markets recovering from an oversold position and stock prices ending higher in December 2009, but there is still a great deal of uncertainty.

Just how big a recovery do managers expect in 2009? Exactly half see an improvement of 10 percent or more over current valuations. According to Fred Martin, chief investment officer at Disciplined Growth Investors, “The U.S. stock market offers the best buying opportunity since 1974 and 1982.”

One out of four managers surveyed expects limited growth between 1 percent and 9 percent.

Fifteen percent of managers expect the market to be static, and there are bears about, as well. Although they form a distinct minority, about 8 percent of surveyed managers expect further declines.

While uncertainty remains, managers overall believe that the economy – and the market – will turn the corner next year. According to Joshua Shaskan, portfolio manager, Transamerica Investment Management, “December 2009 feels like ages from today, but it is hard for me to believe that we will not be feeling better about our economic outlook in 12 months’ time.”

Erik Ristuben is the chief investment officer for Russell Investments. This article is one in a series of monthly columns by Russell associates.