Institutional investment managers expect continued growth in the global economy and corporate earnings, combined with stability in both interest rates and the housing market.

The optimistic outlook, according to a quarterly survey conducted by Northern Trust Global Advisors (NTGA), is the same as at the end of the third quarter 2009, including the perception by nearly half (45%) of managers that the US equity market remains undervalued even after a sharp increase through much of 2009.

The fourth quarter survey showed an overall stabilisation of optimism for the market and global economic conditions, according to Chris Vella, global director of research for NTGA.

"Managers have some concerns regarding inflation and the impact of a withdrawal of economic and monetary stimulus. These issues are being watched closely by managers, but don't appear to pose an immediate threat to market stability," Vella added.

While over three-quarters (76%) of managers expect global growth to accelerate over the first half of 2010, this signals a drop over the previous quarter when 84% held this view.
Managers who expect global growth levels to remain the same for the first half of 2010 rose to 22%, up a bit from 16% in the third quarter of 2009.

The outlook for corporate earnings remains positive. A solid majority (84%) of managers expect profits to increase in the first quarter of 2010. Under a quarter (21%) expects an increase interest rate in the first quarter while 77% expect rates to remain unchanged.

Reflecting future performance potential, 45% believe the S&P 500 Index is undervalued while 35% said the S&P 500 was appropriately valued.

Under half (45%) said they expect increased inflation in the next six months, up from 43 percent with that view in the third quarter. A majority (52%) predict global inflation will remain the same for the first half of 2010.

Managers appear to be holding steady in their investment strategy. A majority of managers (56%) stated they have had no change in risk aversion and 86% are within their normal range of cash holdings. There was some evidence managers have further decreased cash positions in the final quarter of 2009, with 13% at or under their minimum cash holdings, compared with 10% in that position in the third quarter of 2009.

Investment managers said technology, healthcare, energy, emerging markets and consumer discretionary were the top five most attractive market segments. Emerging markets made its first appearance on the list, while materials and industrials fell out of the top five.

While a near-majority (48%) viewed the Japanese equity market as appropriately valued, the remaining 37% of managers believed that market is undervalued. There was a greater dispersion of responses regarding emerging markets: 38% of managers said emerging market equities are overvalued, while 30% believe these markets are undervalued.

The survey of over 100 institutional managers, including fixed income and long-only equity managers across value and growth styles, with a bias toward fundamental, bottom-up stock picking strategies, was conducted by NTGA in mid December 2009.