Northern Trust Corp., the asset manager that oversees $803 billion, is making its biggest bet on equities since 2008 on signs of economic revivals across the world’s largest developed markets.
The money manager’s stock positions outweigh the benchmarks it tracks by 11 percentage points, the highest level in five years, while its bond investments trail by 9 points, according to chief investment strategist Jim McDonald. He’s buying European and Japanese shares as those economies strengthen, while predicting that the U.S. Federal Reserve will reduce its monthly bond-buying more slowly than most investors expect.
“Developed economies have got better economic momentum and easier monetary policy,” McDonald said by phone from Melbourne on Sept. 11. “The U.S. recovery continues to look pretty solid. The market is overestimating how quickly the Federal Reserve is going to tighten policy.”
European stock markets from Greece to Spain and Finland led developed-world gains this quarter through Sept. 13, climbing as much as 20 percent, while the Standard & Poor’s 500 Index closed last week within 1.3 percent of its record high. Northern Trust has 28 percent of its portfolio in U.S. equities, betting on a strengthening economic recovery driven by the property market, according to McDonald.
Foreclosure filings fell 34 percent in the U.S. last month as first-time defaults dropped to the lowest level in almost eight years. The S&P/Case-Shiller index of property values in 20 cities rose 12.1 percent in June from a year earlier.
“The next new leg up for growth in the U.S. economy is a secular upturn in the housing market,” McDonald said.
The Fed will end bond-buying in June, after reducing its $85 billion in monthly purchases by $10 billion at its two-day meeting starting today, according to the median estimate of 34 economists surveyed on Sept. 7 by Bloomberg News.
Northern Trust, based in Chicago, favors Japanese shares as improving business sentiment bolsters profits, and European equities because the region’s economic outlook and valuations are attractive, McDonald said.
The Stoxx Europe 600 Index surged 13 percent from a June 24 low through Sept. 13 as reports showed euro-area consumer sentiment rose to the highest level in two years in August and and output at European factories improved. In the U.K., gross domestic product will rise 2 percent in 2014, the fastest pace since 2007, according to the median estimate of economists surveyed by Bloomberg News.
“We’re seeing clear evidence that the economic momentum in Europe and in the U.K. is increasing,” said McDonald. “If you take improving economic momentum with stock-market valuations, that sets the stage for good return potential.”
The Stoxx 600 traded at 14.2 times estimated earnings on Sept. 13, compared with 15.3 for the S&P 500 and 14.7 for Japan’s Topix index, according to data compiled by Bloomberg.
The MSCI World Index of shares gained 4.1 percent this month through last week, while a Bank of America Merrill Lynch index of global debt sunk 0.4 percent as yields touched the highest since December 2011. The Topix climbed 7.2 percent.
Japan’s small business confidence has been rising since July, climbing to 50.5 in September, according to a monthly survey of 1000 companies from the Shoko Chukin Bank, conducted during the first 10 days of every month. Prime Minister Shinzo Abe and the Bank of Japan are seeking to guide the country out of deflation with economic stimulus and reforms.
“What’s happening with business confidence is sufficient to keep earnings growth going,” McDonald said. “The market is giving, and will continue to give them the benefit of the doubt ahead of further structural reforms.”