Cash remains 'King of the Castle' for Aussie managers, says Russell research
Australian managers, as in the previous quarter, continue to be cautious in their investment outlook - with rising sentiment that the local share market is undervalued and increased optimism for LPTs
SYDNEY, 26 March 2008 – Australian investment managers’ preference for cash is on the increase according to the latest edition of Russell's quarterly Australian Investment Manager Outlook (IMO) survey report. The March report found that a record 60 per cent of respondents preferred cash, up from 52 per cent of respondents last quarter and 43 per cent in Q3 of 2007. This cautious trend also shows up in the strengthening bias for Australian bonds – the strongest in the survey's twelve quarter history.
The March report also revealed a huge shift in valuation sentiment towards the Australian market with a drop in the proportion of managers who view the market as overvalued from 43 per cent to 24 per cent, and the proportion of managers who view the market as undervalued rising to a record 37 per cent.
Pessimistic views towards global equities reached the highest level since the survey's inception, with 46 per cent of survey respondents bearish towards global equities. In contrast, optimism towards Australian equities increased this quarter with bullish views increasing from 27 per cent to 37 per cent and bearish views declining from 48 per cent to 40 per cent. This optimism also touched Australian small cap equities, with bullish attitudes increasing from 16 per cent to 20 per cent and bearish views reducing slightly from 66 per cent to 63 per cent.
Apart from the growing preference for cash, the other big asset class shift was towards listed property trusts (LPTs). The recent shakeout has caused some managers to become more positive on the sector. The portion of managers bullish towards LPTs rose from 9 per cent to 22 per cent this quarter, while those bearish fell from 77 per cent to 54 per cent. In net terms, managers are still negative towards the LPT sector, because of concerns that LPTs have not yet demonstrated a compelling value proposition. However, the gap between bullish and bearish views is now the smallest in the twelve-quarter history of the survey.
The Russell IMO surveys Australian fund managers each quarter on their sentiments of a variety of investments, including local and international equities, listed property trusts, bonds and cash. This period, 41 fund managers responded to the March IMO survey, which provides one of the most comprehensive indicators of current market sentiment available in Australia.
This quarter, managers were again asked about their expectations regarding the performance of the Australian share market in 2008. Not surprisingly, a significant proportion still anticipates disappointing returns in 2008. One in ten respondents believe that the market will close up 10 per cent or more, three in ten managers expect returns of 10 per cent or less and four in ten believe that the market will end flat or down less than 10 per cent.
The US treads where Aussies fear to go
Russell’s Senior Investment Strategist and IMO commentator Andrew Pease noted that a recurring theme of this quarter’s IMO results is the continued gloomy views held by Australian investment managers versus the decidedly more optimistic outlook of their US colleagues.
“Despite the current market gloom, US managers appear more resilient in their beliefs that aggressive Fed easing and fiscal stimulus will revive the US economy. They see potential for stronger earnings growth in 2009, while Australian managers worry that the local earnings cycle may have peaked,” Mr Pease said.
US managers have a similar view to Australian managers on market valuation. A record 42% of US managers believe their equity market to be undervalued (37% of Australian managers view the local market as undervalued). Despite sitting at the centre of the subprime storm, however, two-thirds of US managers believe their market will post positive returns in 2008 while only a minority of Australian managers believe the local market will end the year in the black. At first glance, this seems surprising give the current strength of the Australian economy and the limited direct exposure to the US financial problems. Pease points out, however, that if you ‘scratch below the surface’, there are some plausible reasons for the relative gloom of Australian managers.
“The Australian share market has a disproportionate weighting to financial sector stocks, making it especially vulnerable to negative sentiment towards this sector. Also, Australian shares have strongly outperformed global developed markets over the past year, providing more downside risk. Arguably, most important is that aggressive monetary tightening by the Reserve Bank means that domestic profits growth is likely to come under significant downward pressure in the coming year,” Mr Pease said.
Resources gain favour, but Australian managers remain on the defensive
Managers have become more confident toward their outlook for the resources sector according to the March IMO. The proportion bullish towards metals and mining increased from 48 per cent to 54 per cent while the number of bears fell from 33 per cent to 24 per cent. There was a bigger shift in the energy sector with bullish views rising from 45 per cent to 54 and bears falling from 30 per cent to 19 per cent. The confidence on the outlook for resource shares is linked into the view that China's energy and metal demand may 'decouple' from the US growth slowdown.
According to the report managers are continuing to warm to telecommunications sector with the 35 per cent of managers positive on the sector outnumbering the 22 per cent that are bearish.
The report also found that financials remain out of favour, with the number of bears (51%) exceeding bulls (38%). Australian managers remain cautious on small caps with only one-in-five bullish on the sector while almost two-thirds are bearish.
The long and short of it
"The March quarter survey shows that Australian fund managers remain understandably cautious in response to the high levels of market volatility and uncertainty regarding the US and global economic outlook. Not surprisingly, risk free-cash yields in excess of 7% seem attractive in this environment. Even so, there is a clear sense that the market shakeout is returning value for investors with a longer time horizon.
"US managers, although battered by the sub-prime storm, can see a Federal Reserve led recovery on the horizon. Australian managers can only wonder about the downside potential to domestic profits from RBA tightening, and pin their hopes on the continuing resilience of commodity markets," Pease concluded.
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