Russell Investments’ new Barometer recommends investors should ‘tilt’ towards global credit markets
Latest Russell Barometer recommends investors remain at strategic benchmark weight for growth assets
August 5, 2009 - Russell Investments today launched its latest market Barometer which recommends investors increase their strategic tilt towards investment grade global corporate credit markets but remain at their benchmark allocation for Australian and global equities.
The Russell Barometer provides a quarterly snapshot of the core themes driving investment markets, as well as Russell’s outlook for the major asset classes. The August Barometer adds a new element which will now discuss asset classes in the context of Russell’s new strategic titling framework which advises investors to temporarily adjust or ‘tilt’ a portfolio away from its long-term strategic asset allocation (SAA).
According to Andrew Pease, Investment Strategist at Russell Investments and author of the Barometer, the new element helps investors identify whether an asset class is at an unsustainable extreme in terms of pessimism or optimism and, if so, whether there is a high case for making a tilt away from their long-term strategic asset allocation.
“It’s possible that in times of relative market stability, there may be periods of up to several years where no tilting opportunities are evident. There will also be times, like now, when markets have been through such dramatic upheaval that a number of tilting opportunities are under consideration,” Mr Pease said.
Global corporate credit: back in vogue
The August report recommends investors increase their allocation to investment grade global corporate credit from a low level tilt to a medium level tilt to take advantage of falling equity volatility, rising business confidence and investor inflows into the sector.
The report also puts forward a strong case for investors to be at the benchmark allocation for Australian and global equities which look undervalued from a medium-term perspective and offer long-term value. A key recommendation is that investors still underweight to the Australian and global equity sectors should think about returning to their long-run equity position.
“The powerful rally in global equity markets since March 2009 serves as a reminder of how quickly market conditions can turn and the difficulty of timing exit and entry points,” Mr Pease said. “By late July, the MSCI World share price index had gained 50per cent. The S&P/ASX 300 was up 35 per cent. It’s unlikely that many of the investors who had shifted to a defensive portfolio in March would have moved quickly enough to take advantage of the market rebound.”
In other asset views, the global REIT sector continues to show good value however the sector still faces significant challenges from falling property values, debt refinancing and recapitalisation, and therefore the August Barometer does not recommend tilting towards this asset class.
The report found that the Australian dollar has surged over the last four months as risk appetite has returned and commodity prices have lifted. At around A$0.80, the dollar is expensive, however, it is not yet at a valuation extreme and the balance of risks seems biased towards further dollar strength. Therefore the report recommends that the currency hedge ratio should remain in line with the long-run strategic benchmark.
“The Australian dollar is often viewed as a barometer of global investor risk appetite, rising when investors become more risk seeking and falling as risk aversion sets in. Investors are slowly gaining confidence that the financial crisis is largely over and that economic activity around the world has bottomed and is poised to stage some sort of a recovery by the end of 2009,” Mr Pease said.
Australia: the lucky country
Mr Pease said Australia’s economy seems likely to escape lightly from a significant global downturn and now looks likely to experience a mild recession, in contrast to the US, Japan and Europe. The main bit of luck for Australia has been the resilience of China’s economy, which helped Australia’s merchandise exports grow by 30 per cent in the year to March 2009.
“The strength of the recovery has caught many by surprise and although investor expectations are now being scaled higher, it’s likely that the pace of recovery will continue to surprise as it has after every other recession,” Mr Pease said.
“While the worst appears to be over, the outlook is still not clear cut. Many of the issues that caused the crisis are yet to be fully resolved. Banks globally still have to cope with rising bad debt levels, credit markets are far from normal and unemployment will continue to rise until well into 2010. However, it is useful to distinguish between the trend and cycle. Belief in a lacklustre growth trend in 2010 and beyond is consistent with a powerful short-term bounce in profits and economic activity from deeply depressed levels,” Mr Pease said.
A copy of the full August 2009 Barometer report is attached.
Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 (“RIM”). This document provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. This information has been compiled from sources considered to be reliable, but is not guaranteed. Past performance is not a reliable indicator of future performance. Any potential investor should consider the latest Product Disclosure Statement (“PDS”) in deciding whether to acquire, or to continue to hold, an investment in any Russell product. The PDS can be obtained by visiting www.russell.com.au or by phoning (02) 9229 5111. RIM is part of Russell Investments (“Russell”). Russell or its associates, officers or employees may have interests in the financial products referred to in this information by acting in various roles including broker or adviser, and may receive fees, brokerage or commissions for acting in these capacities. In addition, Russell or its associates, officers or employees may buy or sell the financial products as principal or agent.