It’s official: International equities set to outperform Australian market in 2006
Australian fund managers more bullish on international markets as confidence in local equities slumps
SYDNEY, 20 December, 2005 – Australian institutional investors have given their strongest signal yet that international equity markets are back on the rise, with 67 per cent of local fund managers now bullish on prospects for international equities – a jump from 51 per cent last quarter. Australian fund managers now expect international equities to outperform listed property trusts, Australian equities and bonds over 2006. The shift in consensus sounds a clear wake-up call for local investors as managers also continue to downgrade the outlook for Australian equities.
These are the key findings from the December 2005 Russell Australian Investment Manager Outlook – a quarterly research report released today by Russell Investment Group . The report is based on the feedback of approximately 50 leading Australian-based managers during the first half of December 2005, and represents one of the most compelling indicators of Australian investor sentiment available.
While investors have enjoyed spectacular returns from the local equities market over the past three years – on track to hit 20 per cent per annum to December 31 2005 versus 6 per cent for international shares – fund managers are becoming increasingly divided on the outlook for the sector. Since the first Russell Australian Investment Manager Outlook in June 2005, bearish sentiment for Australian equities has steadily increased from 27 per cent in June to 33 per cent in September and now 43 per cent in December.
According to Russell Chief Investment Officer for the Asia Pacific, Peter Gunning, the results reflect Russell’s US Investment Manager Outlook, with US-based fund managers also showing increasingly bullish sentiment towards their home market, despite the US economy weathering unpredictable shocks such as Hurricanes Katrina and Rita, and continuing interest rate increases.
“These indicators from a broad spectrum of local and offshore fund managers reinforce the need for Australian investors to consider their overall asset allocations as we head into the New Year,” Mr Gunning said.
“Many investors get preoccupied by choosing fund managers and backing the right local stocks, but research overwhelmingly shows that asset allocation decisions (eg how much you are exposed to equities, bonds, cash, property etc) makes a far higher impact on overall portfolio performance than stock selection,” Mr Gunning said. “While many Australian investors have benefited from a classic ‘home bias’ to Australian shares, it’s important to remember that Australia makes up only 2 per cent of world markets. Proper diversification across asset classes and a long-term approach to risk and return – especially with superannuation savings – are the two most important things to get right.”
The December report found managers’ overall sentiment re the Australian equity market valuation remained steady since last quarter. Managers who find the Australian equity market expensive outnumber those who find it undervalued by almost eight to one. At present levels, 48 per cent of managers say the domestic market is ‘fairly valued’, with 46 per cent considering it ‘over valued’ and 6 per cent ‘under valued’.
Within the Australian equity market, managers remain favourably disposed to the energy, materials and healthcare sectors, but continue to eschew the telecommunications and consumer discretionary sectors. Across the board, however, managers are less bullish than last quarter in every one of the 10 industry sectors.
Asked what would be the largest influence on investment markets in 2006, 46 per cent of managers nominated corporate earnings as the key driver, with interest rates (28 per cent) and energy/oil prices (23 per cent) being the main secondary factors. Further key findings from the December Russell Australian Investment Manager Outlook include:
- Small caps making comeback? Managers remain bearish on small caps (56 per cent bearish), but less so than September (67 per cent) and June (73 per cent).
- LPTs still out of favour: Of all asset classes, managers are most bearish on Australian Listed Property Trusts (62 per cent bearish), up from 55 per cent in September.
- Bonds more popular: Managers remain bearish on Australian bonds (53 per cent) but less so than September (69 per cent) and June (74 per cent).
- Currency confusion: For the second quarter running, opinion on currency has been the most volatile, with 38 per cent of managers now bearish on $A v $US (29 per cent in September) and only 23 per cent bullish (48 per cent in September). $A sentiment has been fluctuating heavily since the poll’s inception in June 2005.
Mr Gunning said there was general consensus that the RBA is unlikely to raise cash rates significantly over the course of 2006 as moderating economic growth, subdued consumer sentiment, relatively benign inflation and current interest rate differentials with the rest of the world lessen the likelihood of any aggressive moves by the RBA.
“With initial fears of higher oil prices fuelling a sharp increase in inflation dissipating, the market’s negative sentiment to Australian bonds is also moderating. While managers remain negative on the outlook for Australian bonds (53 per cent) this has substantially subsided since June 2005 when 74 per cent of managers were bearish on the sector,” Mr Gunning concluded.
Issued by Russell Investment Management Ltd ABN 53 068 338 974 (RIM), AFS Licence 247185. The information contained herein has been obtained from sources that we believe to be reliable, but its accuracy and completeness cannot be guaranteed. The information, analysis, and opinions expressed herein result from surveys of persons outside Russell Investment Group and may not represent the opinion of Russell Investment Group, its affiliates, or subsidiaries. Please note, managers surveyed do not necessarily manage Russell products. This document provides general information only. It 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. The information has been compiled from sources considered to be reliable, but is not guaranteed. Past performance is not indicative of future performance. RIM or its associates may have interests in financial products mentioned in the report and may receive fees, brokerage or commissions. In addition, RIM or its associates, officers or employees may buy or sell financial products as principal or agent. You may contact RIM on 9229 5111. © Russell Investment Group 2005. All rights reserved.
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