Resources sector the favourite, but managers gloomy on market outlook
Australian fund managers bullish on materials and energy, bearish on investment markets and see private equity as over-inflating valuations; according to Russell IMO
SYDNEY, 27 June, 2007 – Australian fund managers have significantly shifted their views on resources with record high numbers of managers feeling bullish on the sector, according to the latest Russell Investment Manager Outlook (IMO) survey released today. However, there is a growing bearish sentiment towards Australian Equities with more than half of the managers surveyed believing the Australian market to be overvalued.
Another key finding centered around the divergent views of domestic markets between Australian fund managers and their US counterparts. 54 per cent of Australian managers believe the Australian market is over valued (up from 49 per cent in the previous quarter) compared to only 17 per cent of US managers who believe the US market to be overvalued.
The Russell IMO surveys Australian fund managers each quarter about their sentiment towards a range of investments including local and international equities, listed property trusts, bonds and cash. With more than 50 responses from leading fund managers, it is one of the most comprehensive indicators of current market sentiment available in Australia.
This quarter, the unprecedented resources boom has come to the fore with rising bullish sentiment towards energy and materials among the stand-out findings. However, despite the Australian sharemarket continuing to perform solidly, there was a growth in bearishness for Australian equities and a continued preference for international stocks.
Russell’s Chief Investment Officer for the Asia Pacific, Peter Gunning, said that investment manager’s preference for international shares has proven to be a recurring theme of the Russell IMO. “In the June quarter, 57 per cent of managers remain bullish on the 12 month outlook for international equities – a number largely unchanged since the first Russell IMO was released in June 2005,” he said.
Mr Gunning said one of the most interesting changes this quarter was the improving attitudes to the energy and materials sectors. “The best two performing sectors of the quarter, materials and energy, have made an impact with bullish views increasing from 49 per cent to a record 63 per cent in the energy sector and the bears at an all time low of just 18 per cent,” he said “Bulls also rose from 43 percent to 57 per cent on materials.”
The prognoses remain bearish on the outlook for Australian bonds, LPTs and small cap Aussie equities. Mr Gunning said that despite a year to date return of 12 per cent for the Australian equities market – local investment managers maintain their view that global markets offer greater value.
“Sector preferences remain broadly unchanged with sentiment strongly bearish on Small Caps, consumer discretionary, industrials, telecommunications and utilities and bullish on consumer staples, health care and financials,” he said.
”The June IMO reveals managers remain cautious despite the strong performance of the Australian equities, small caps and LPT sectors. Even though certain sectors of the Australian market are really performing well – managers remain keen on the overseas equity markets.”
Bonds still out of favour
Poor performance of Australian bonds has helped to cement a negative view on bonds – the UBS Composite Bond Index returning only 1.5 per cent this year and LPTs have not fared much better. Bearish views, 59.3 per cent of managers, up from 38.5 last quarter, were well supported when the sector posted a return of -2.3 per cent for the March quarter. However, the June quarter rebound of 5.1 per cent helped reinstate some optimism among fund managers with a lift in bullish sentiment from just 9.6 per cent last quarter to 16.7 for June 07.
The private equity effect
This quarter, the survey also queried the impact of recent private equity activity on the sharemarket. 70 per cent of managers believe that the private equity phenomenon is pushing valuations too high and introducing excessive leverage to the market. The views that private equity deals are identifying undervalued companies and encouraging positive corporate restructuring were evenly divided between managers.
The MSCI All Country World Index returned 5.4 per cent over the quarter to June 12, with the local market returning 4.7 per cent for the quarter. However, the local market outperformed the world return by 3.9 per cent in the year to date. The twelve month outlook for Australian shares sees the views of managers remain evenly divided with 33 per cent bullish, 35 percent bearish and 32 per cent neutral.
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