FYI | Mar 24 2009
By Chris Shaw
Even after the rally in equity prices over the past couple of weeks, professionals in the Australian fund management sector continue to see value in the Australian share market according to the latest quarterly survey of fund managers by Russell Investments.
The group’s “Investment Manager Outlook” surveys 40 leading fund managers in Australia and the latest responses show 59% of managers view the Australian market as undervalued at present, with relative value a particular feature given managers are more bullish on local equities rather than international stocks for only the second time since the survey began in 2005.
Breaking this down further, the survey showed 28% of respondents see the Australian market as fair value around current levels, down from 32% in the previous quarter, 13% see it as overvalued and the 59% viewing the market as undervalued is a 3% increase from the previous survey.
Among those surveyed, 60% expect the Australian market, as measured by the S&P/ASX20 Index, will finish 2009 above the 3,500 level, while 15% are more bullish and predict the index will end the year somewhere between 4,000 and 4,500 points. As the group’s investment strategist Andrew Pease notes, the survey shows fund managers believe the Australian market will offer value through the course of this year.
Pease does point out while the overall outlook is bullish this sentiment is a little weaker than was the case a few months ago, largely reflecting increased concerns regarding the depth and persistence of the global financial crisis. A home market bias is also nothing unusual as Pease notes the group’s survey of US managers returned similar results, with 50% expecting the US market to continue its upturn but only 29% expecting markets in other developed economies to follow suit.
Volatility remains an issue in the short-term however, and is making fund managers more cautious, as reflected by the survey showing sentiment towards almost all asset classes and sectors weakened in the latest quarterly survey. This trend was most pronounced in the small cap and real estate investment trust sectors.
For the listed property sector 61% of fund managers are now doubtful on its prospects and only 26% are willing to take positions in this sector at present. This is hardly surprising given the sector has lost two-thirds of its value over the past year.
In contrast, fund managers are most optimistic on the outlook for the healthcare sector, the survey showing 56% of managers are confident on the sector’s prospects, double the number with a bearish view. As Pease notes, the sector has already enjoyed solid performance in recent months given its perceived defensive characteristics.
While the consumer staples sector is also regarded as a defensive one it appears fund managers see this as priced in and the sector is now labelled ”expensive defensive”, with 36% of managers still bullish, but 30% bearish at the current time. Consumer discretionary stocks are not expected to perform in coming months as only 25% of managers expect this sector to move higher in the coming year against just more than 50% predicting further declines in the next 12 months.
The recovery in the oil price is improving sentiment towards energy stocks, with now nearly 50% of managers bullish on the sector and only 25% bearish in this latest survey. According to Pease this mirrors the current situation in the US, where managers in that market are also bullish on their local oil and energy sectors.
Other sectors where more than 40% of respondents were bullish on the outlook over the next year include Materials, IT and industrials, while 39% are bullish on financials, down from 44% in the previous survey. Only 34% of respondents are bullish on Telcos, down from 42% three months ago.
While equities are seen as good value Pease notes around half of the managers surveyed expect Australian bonds to decline in value from recent highs, while almost two-thirds of managers are bearish on the outlook for cash as an investment class.
Expectations for the Australian dollar are similarly bearish, the survey finding only 35% of respondents were bullish on the currency against the US dollar, down from 45% in the previous quarterly survey.
