According to the most recent quarterly survey of U.S. investment managers conducted by Russell Investments, managers appear ready to put the “risk trade” back on despite the fact that the markets have been weighed down by slowing economic data. Over half (57 percent) of professional money managers responding to the latest Investment Manager Outlook now believe the market to be undervalued, the second-highest percentage in survey history and the highest since the March 2009 survey. Only 7 percent of managers believe the markets are overvalued.

“Managers are positioning themselves for economic growth. Their sector preferences align with their view that over the next year capital spending will be a significant component of a slow-growth recovery”

“With more conviction than at any point since the depths of the global credit crisis, the managers now believe the market to be undervalued but are far from expecting the same kind of surge that followed the market bottom of March 2009,” said Mark Eibel, director, Client Investment Strategies at Russell Investments. “Even still, optimism within a framework of diminished expectations is still optimism, and the most positive managers may be holding out hope that a tidal change is beginning to gather momentum, one built on strong corporate earnings and a recovering economy.”

According to the survey, professional money managers are looking to business spending to drive economic growth. Nearly half of managers surveyed (49 percent) expect capital spending on equipment and construction will be the type of expenditure most likely to drive economic growth in the U.S. over the next 12 months. Eighteen (18) percent of managers point to government spending and investment as the main driver, and 15 percent believe personal consumption will play that role. Only 9 percent of managers anticipate that the economy will not experience growth over the next 12 months.

“It is interesting that only a small percentage of investment managers responding to the survey believe the economy will not grow at all, which is a bit at odds with the broad speculation around a looming double-dip recession,” said Eibel. “Uncertainty led many businesses to delay expenditures in 2008 and 2009, but the managers now expect that spending to come. The question that remains is how robust the spending will be.”

Russell’s Investment Manager Outlook is an ongoing survey intended to generate a meaningful snapshot of investment manager sentiment each quarter. For the current installment of the survey, Russell collected the opinions of senior-level investment decision makers at U.S. large cap and small cap equity investment managers, as well as at U.S. fixed income investment managers. Nearly 170 managers participated in this survey.

Additional findings from the Investment Manager Outlook include:

Manager bullishness grows most strongly for energy sector and materials and processing sector

In the latest survey, technology maintained its long-running position as the most preferred sector at 69 percent bullishness, followed by energy and then materials and processing, at 51 percent and 48 percent respectively. Both energy and materials and processing saw an 8 percentage point increase in bullish sentiment from the June 2010 survey.

“Managers are positioning themselves for economic growth. Their sector preferences align with their view that over the next year capital spending will be a significant component of a slow-growth recovery,” said Eibel. “Where bullishness for the consumer discretionary sector dropped 17 percentage points from last quarter to 30 percent, traditionally pro-cyclical sectors like technology, energy, and materials and processing are in favor.”

Manager bullishness for the health care sector also dropped notably from the last iteration of the quarterly survey. Forty-eight (48) percent of managers were bullish on health care in the latest survey, down from 60 percent in June 2010 and 63 percent in March 2010.

Emerging markets and international developed markets reasserting dominance

Managers’ turn to the risk trade was also reflected in several notable shifts in asset class sentiment. Bullishness for emerging market equities rose 10 percentage points from the last survey to 71 percent. Only 12 percent of managers surveyed were bearish on emerging market equities, an all-time low for the survey. While manager bullishness for non-U.S. (developed market) equities rose 18 percentage points from June 2010 to 52 percent, this measure of optimism is still down from 63 percent one year ago.

“Managers and the markets wavered when crisis hit the eurozone, but better news out of Europe appears to have strengthened manager bullishness for non-U.S. developed markets,” said Eibel.