Australia | Jun 25 2008
By Chris Shaw
The good news is the worst of the market’s struggles may be over and the March lows are unlikely to be breached, but it remains too early to be more aggressive with respect to Australian equities according to the findings of the latest Russell Investments survey of fund managers.
The survey found about two out of three managers believe the worst has been and gone, although bearish views towards Australian equities this quarter have actually risen 3% to 42%. Much of this is on the back of managers becoming increasingly bearish with respect to the listed property sector, where 65% of mangers have a negative view compared to 54% in the March quarter survey.
Emphasising the defensiveness of professional investors at present the survey found half of the 41 managers had a preference for cash, which while down from 60% in the previous survey meant cash was still the largest asset class at present. Also gaining support were bonds, which were favoured by a further 37% of managers, the highest reading in the history of the survey.
Equities were not completely forgotten though as the survey showed 58% of managers now see Australian shares as fairly valued, an increase from 39% in the previous survey, though only 16% see the market as undervalued against 37% last quarter and 26% considering the market as overvalued.
Among the various market sectors consumer staples were favoured by 52% of managers, while utilities and healthcare were next most preferred at 46% each. At the lowest end of the scale only 19% of managers are bullish on consumer discretionary stocks, while just 15% have a preference for the IT sector currently.
Of interest in terms of the professional’s view of the market, Russell investment strategist Andrew Pease notes the survey showed the resources boom is beginning to lag as profit taking hits the sector and optimism levels start to fade.
As an example he notes the materials sector recorded a 39%/54% bullish to bearish split this quarter, well down from the 54%/24% split seen in March, while the energy sector similarly now has a 54% bearish rating among managers despite these two sectors being the Australian market’s best performers for the year to date.
Those who have watched as bank shares have continued to fall can take some heart from the fact the 32%/39% bullish to bearish split of fund manager views represents a narrowing of the gap, which suggests recent weakness among these stocks is beginning to present some value to investors.
Industrials generally remain somewhat out of favour as the survey shows 37% of managers are bearish on the sector against 33% with a bullish view, while those taking a neutral view have fallen to 30% from 43% previously. Telecommunications stocks are coming more into favour though, as bullish views on the sector have risen to 44% now from 35% in the March quarter, while only 26% of managers are bearish.
While fundamentals suggest there may be value to be found among small caps this is not where the managers are looking for opportunities, as 71% are bearish on the smaller end of the market at present compared to 63% in the previous survey.
As well Pease notes 47% of managers are bearish on the Australian dollar now compared to just 25% in the March quarter, which suggests the “commodity currency” may have seen its highs for the year. This remains a less than clear cut case though as 40% of managers continue to be bullish on the Aussie dollar.
In terms of the market outlook the survey found 58% of fund managers see a flat outlook for the rest of 2008, an outcome broadly in line with the 53% of managers in the US with a similar view. Arguments for such a view include ongoing uncertainty in credit markets, slowing economic growth, rising fuel costs and increasing inflationary pressures, all of which apply to both markets at present.