FYI | Oct 06 2011
– Russell Investments releases September quarter fund manager survey
– Survey shows fund mangers continue to prefer defensive assets
– Australian equities seen as undervalued
– Interest cuts seen as most likely catalyst for domestic non-mining growth
By Chris Shaw
In the September quarter investors have had to deal with continued equity market weakness and heightened market volatility, reflecting escalating European sovereign debt concerns and doubts about the sustainability of a US economic recovery.
The latest Russell Investment Management survey of Australian investment managers and their views about the market has been conducted with this as a backdrop, the result being some changes in views from the June quarter.
A total of 31% of managers are now bearish on international shares, Greg Liddell, Russell managing director, consulting and advisory services, noting this is ten times the number of managers that were bearish on the asset class at the end of the March quarter.
A majority of fund mangers, 77%, see the Australian equity market as undervalued, the highest number of managers with such a view since Russell began its surveys in 2005. In contrast, 6% of managers see Australian stocks as overvalued at present. The positive views reflect an assessment the Australian economy is relatively well placed compared to developed counterparts.
What didn't change was the number of managers largely maintaining a preference for defensive assets, as evidenced by a further rise of 10% in bullish sentiment with respect to Australian bonds. At the same time bearish sentiment among managers towards growth assets such as Australian and international shares also increased, by 6% and 10% respectively.
The more defensive nature of Australian REIT shares meant managers turned less bearish on the sector in the September quarter. Overall, Liddell, notes managers remain more bullish on domestic shares at 66% than on international shares at 57%.
Views are most bullish for the telecommunications, materials and industrials sectors. Between 59-62% of mangers are bullish on these sectors, which for industrials is an increase from 46% last quarter. Financials are also becoming more popular with 47% of managers now bullish, up from 42% previously. While a majority of managers are bullish on the materials sector, Liddell notes bearish sentiment towards this sector has doubled from 19% to 38% in the June quarter.
At the other end of the market managers are least bullish on the consumer discretionary, IT and consumer staples sectors, with only 29-35% of managers bullish on these sectors and 50% of managers bearish on consumer discretionary stocks.
For smaller capitalisation stocks around one-third of all managers are bearish at present according to Liddell, which compares to 20% of managers being bearish on the broader market.
Falls in the Australian dollar during the quarter allowed managers to become more bullish on the currency, with 15% more managers taking a positive view on the dollar than was the case in the June quarter.
As market volatility has risen a series of interest rate cuts have been priced in for the next 12 months in Australia and Liddell notes this has seen sentiment towards Australian cash turn more bearish. A total of 37% of managers are now bearish on the domestic cash market, up from 26% in the June survey.
At the same time sentiment towards Australian bonds has improved, with 29% of managers now taking a bullish view. This is up from 19% in the June quarter and, as Liddell suggests, highlights the fact Australian bonds are better value than international bonds at present.
With the Australian economy continuing to show significant divergence in performance between the resources sector and the rest of the market, managers were asked what could spark a recovery in domestic growth.
Liddell notes interest rate cuts by the Reserve Bank of Australia was the most likely catalyst according to 43% of managers, while about 35% suggested the most likely catalyst would be an economic recovery in global developed markets.
A similar survey by Russell of fund managers in the US showed a significant majority of managers, 79%, don't see the US economy entering a double-dip recession. This is due to strong corporate balance sheets and high corporate profit levels offering some reasons for optimism.
In contrast, a total of 11% of US fund managers suggests the US is entering a double-dip recession, with most of these managers suggesting a jobs recovery is the critical element needed to drive a recovery in the broader economy.
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