Australia | Oct 09 2012
By Eva Brocklehurst
According to the latest Russell Investments quarterly survey of Australian investment managers, we should expect a sustainable turnaround in the Australian share market within 12 months. From a sample set of 40 fund managers, Russell found 77% expect the local market to turn around by end-2013 and 63% expect this occur by end-FY13. The survey was conducted last month and we note that the ASX 200 has now broken up through stiff one-year resistance in a steady rally which began in June. The emphasis here is thus on the word "sustainable".
The most important contribution to a sustainable turnaround is considered to be a resolution of Europe's debt crisis. This is followed closely by stronger growth in China – and a lower Australian dollar. The bears were herding towards the telco and materials sectors – and the Australian dollar. The number of managers bearish on the Australian dollar reached an historical high of 74%, for a survey which has been going for seven years.
By contrast sentiment on Australian bonds was bearish after yields on long-dated government debt fell to historically low levels. Australian real estate investment trusts lost out in the popularity stakes, as did cash. However, the REITs made very strong gains over the past year which probably raised some doubts about the sector's ongoing value and falling interest rates would certainly have detracted from cash. The bears were seen heading towards the telecommunications sector which was at its poorest sentiment-wise in 18 months.
The survey found 73% of managers preferred domestic shares over global shares and nobody believed Australian shares were overvalued. Sentiment on the domestic small caps was modestly improved, 60% of those surveyed viewed the sector favourably. Small industrials outperformed small resources over the six months to September. Concerns about commodity prices were probably to blame but this was partly reversed in the September quarter.
After the Reserve Bank cut rates in May and June the managers turned bearish on cash and this will now be exacerbated by the cut in early October. As defensive stocks enjoyed a strong run previously they have given way to cyclical stocks as the favourites, suggesting valuations may be a little stretched. The survey wasn't clear cut as some exceptions for cyclicals were seen in materials and industrials. Bearishness towards these two increased, the former reflecting commodity price weakness and the latter the persistently high Aussie dollar.
Energy's bullish sentiment rose significantly because of speculation the global recovery can be sustained. Bullish hopes have been triggered for IT as half of all managers liked the sector. Attractive dividends from the big four banks helped maintain a slight improvement in financials sentiment. Consumer discretionary sentiment improved as the recent rate cuts favoured that sector.
The Australian share market was positive over the period of the survey with the S&P/ASX 300 Accumulation Index gaining 3.3%. Most of the gains were in the September quarter. China remains a key trigger for sentiment in Australia and Russell believes China is still on track for a soft landing, expecting GDP is likely to be 7.5-8% for this year. Russell notes the final factor for a sustainable turnaround in the Australian share market is improving US growth. Despite evidence of a slowdown Russell considers a recession in that economy unlikely.
Russell finds volatility remains a theme in investment markets and counsels genuine diversification at the portfolio level.
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