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SYDNEY, 28 September, 2005 – Investment managers are becoming increasingly concerned with current Australian equity market valuations, with nearly one in two believing the market is overvalued, according to a comprehensive new survey of Australian-based managers by Russell Investment Group. Building on last quarter’s June survey data, today’s survey reinforces the broad view that investors should consider looking offshore for the best returns over the next 12 months.

Released today, the Russell Australian Investment Manager Outlook is based on the feedback of 50 leading Australian-based managers during the first half of September 2005, and represents one of the most compelling indicators of Australian investor sentiment available. The research shows that with the Australian equity market reaching all time highs during the September quarter, institutional investors are baulking at the prospect of ongoing strong relative returns from the domestic market. While 50% of managers surveyed still believe the Australian equities market is fairly valued, 46% now believe the market is overvalued – up from 35% last quarter. Only 4% of respondents believe the domestic market is undervalued (down from 9% last quarter).

According to Russell Chief Investment Officer for the Asia Pacific, Peter Gunning, the results reflect an unusual imbalance in forecast price to earnings (P/E) ratios. “Putting current Australian equity valuations into context, the price to earning ratio of the domestic market on a one year forecast basis is 17.9, compared with the P/E ratio for global markets of 17.8. Traditionally the Australia equity market trades at a reasonable discount to world markets not a premium. If the pundits are correct it will difficult to see the domestic market performing as well as it has relative to global markets going forward,” he said.

Despite the caution on valuations, manager opinion remains equally divided over the outlook for the broad Australian equity market in the next 12 months with 32.7% of respondents bearish, 30.6% neutral and 36.7% bullish . This is little changed from last quarter.

However with the exception of the materials sector, sentiment to all sectors deteriorated or remained in a holding pattern over the September quarter, with consumer discretionary (67.4% of managers bearish) and telecommunications (58.7% bearish) displaying the bleakest outlook. Mr Gunning said investors’ affliction with the consumer discretionary sector continued as the impact of higher oil prices added further caution to a sector already weighed down by concerns over moderating economic growth and a slowing housing cycle.

“Uncertainty over the sale of the government’s remaining share of Telstra combined with a potentially significant capital expenditure program weighed heavily on the telecommunication services sector. Investors remain positively disposed to materials and energy sectors while sentiment towards information technology, financials and industrials remains divided,” he said.

The surprise finding of the survey was a major shift in sentiment towards the Australian dollar, with 48% of respondents now positively disposed to the outlook for the $A compared with only 21% last quarter. This is despite the fact that traditional drivers of the $A, such as interest rate relativities and commodity prices outlook, remain relatively unchanged.

“It appears the catalyst for the change in $A sentiment has been a more bearish view on the $US, with an increasing budget deficit, further buoyed by relief efforts post Katrina, weighing heavily on investors’ minds,” Mr Gunning said.

On the interest rate front, investors’ outlook for Australian bonds over the coming year remains the most negative of all asset classes again this quarter. According to Gunning, around 70% of respondents are bearish on yield prospects with the potential inflationary impact of oil prices no doubt adding caution to an already skittish market.

Further key findings from the Russell Australian Investment Manager Outlook include:

• Two thirds of managers expect oil prices will have a negative impact on Australian share market performance over the next six months, while 20% say the outlook for oil is already priced into the market.
• Investors continue to eschew small capitalisation stocks and as well as listed property trusts. That said, the bearish sentiment directed at domestic LPTs has diminished over the past three months.
• Investors’ outlook for cash remains moderately positive with the asset class increasingly seen as a safe haven, at least in the short term. This appears to be driven by concerns over current domestic equity valuations, bearish sentiment to bond yields as well a commonly held view that relative yields on listed property trusts remain modest.

Mr Gunning said investors continued to favour international equities over the coming twelve months with more than half the respondents (51%) now bullish on international equity prospects (up from 49% last quarter). “Positive sentiment has continued to gain momentum in spite the potential headwinds provided by higher oil prices on global economic growth, the impact of hurricane Katrina, the US Fed tightening cycle continuing and terrorist attacks on the London underground during the quarter.

“Overall, positive sentiment continues to be directed toward international equities at the expense of domestic equities, with an additional question mark for investors over the future direction of the $A and thus the decision to hedge or leave unhedged any international exposures,” Mr Gunning concluded.