Australia | Jun 23 2011
– Fund managers more uncertain about market outlook
– Defensive assets favoured over growth assets
– Managers still relatively bullish on Australian equities
– Australian dollar expected to fall in coming years
By Chris Shaw
Global equity markets weakened in the June quarter, Russell Investments attributing this to ongoing political tensions in the Middle East and North Africa, continued European sovereign debt concerns, inflationary pressures in emerging markets and signs of a mid-cycle slowdown in the US.
In Australia there was the additional concern tighter monetary policy in China would impact on demand for Australian resources, while the stronger Australian dollar was also seen as an issue with respect to earnings for a number of companies.
In response to the June quarter performance, Russell Investments has surveyed fund managers to see how they are responding to current market conditions and where they identify opportunities going forward.
According to Greg Liddell, Russell Investments' director of consulting and advisory services, the growth theme which had dominated recent quarterly surveys reversed during the June quarter as managers became more uncertain about the outlook for global growth.
This left managers more cautious with respect to where they invested. Importantly, Liddell notes most managers remain confident the global economic recovery will continue, even though it will be at a much slower pace.
This caution meant mangers now favour defensive assets over growth assets, Liddell noting there was a sharp fall in bullish sentiment towards international shares to 57% from 88% previously. This was met by increased bullish sentiment towards Australian bonds to 19% from 3% previously. Sentiment towards cash also rose to 26% from 16% in the previous survey.
Bullish sentiment remains slightly better towards Australian shares at 62%, down from 78%, a level Liddell notes is relatively high from a historical perspective. Australian equities also appear to offer value, the survey showing only 5% of managers viewing the market as overvalued at present. This compares to 55% regarding the Australian market as currently undervalued.
Manager sentiment towards the small cap part of the Australian market has turned more bearish in the June quarter, Liddell noting a third of managers now expect a reversal over the next year. By way of comparison, 14% of managers were bearish on the broader Australia market.
Managers are turning more positive on Australian real estate investment trusts, Liddell pointing out bullish sentiment towards this sector rose to 29% from 23% previously. This likely reflects the defensive nature of the asset class.
Among the other sectors, sentiment towards materials stocks fell sharply, with only half the managers in the survey now seeing value in the sector. The more bearish outlook reflects concerns of slower global economic growth and ongoing monetary tightening in China.
Negative sentiment towards the energy sector also increased to 31% from 24% previously, this given expectations of moderating growth and high levels of volatility. Liddell notes bullish sentiment towards the industrials sector was flat at 46%.
Bullish sentiment towards financials fell in the June quarter to 42% from 56% previously, Liddell seeing this as a reflection of knock-on effects from renewed European sovereign debt issues.
With the Reserve Bank of Australia (RBA) viewed as turning more hawkish on rates, Liddell noted 26% of managers are now bullish on the potential for further increases to the cash rate. Despite expectations of higher rates managers remain bearish on the Australian dollar, negative sentiment rising during the June quarter to 62% from 56% previously.
Given a question of what will the Australian dollar be worth in five years' time, Liddell notes the majority of managers expect the currency will fall to between US81-90c. Not one manager expects the dollar to be above US110c in 2016.
Liddell notes potential catalysts for a weakening in the Aussie dollar identified by managers surveyed are a potential slowdown in China, increased risk aversion and delays by the RBA in lifting rates due to weakness in the non-mining sectors of the economy.
While bullish sentiment towards Australian bonds has increased this remains the least favoured asset class for managers, as lower yields mean returns over the medium-term are likely to be poor.
The Russell Investments survey covers results from 36 investment management firms in Australia, the June survey being the 26th edition of the quarterly survey.
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