The worst may be over but Australian fund managers still defensive, according to latest Russell survey
Managers move out of the resources sector and into consumer staples and utilities sectors
SYDNEY, 25 June 2008 – Australian investment managers continue to hold defensive positions in a highly volatile market according to the latest Investment Manager Outlook (IMO) survey. Bearish views toward Australian equities increased to 42 per cent this quarter, up 3 percentage points since the last quarter. Managers also continue to be bearish towards the listed property sector, with bearish views increasing to 65 per cent from 54 per cent from the previous quarter.
Despite the defensive attitudes of Australian money managers, the IMO survey found two in three Australian managers believe that the worst is behind them, agreeing that the Australian share market low (ASX 200) on 18 March 2008 will be the lowest point in the market for 2008.
The preference for cash fell slightly this quarter to 50 per cent (previously 60 percent), but remained the most favoured of all asset classes. The defensive trend was also reflected in the strengthening sentiment towards Australian bonds, with 37 per cent of investors now favouring Australian bonds - the strongest in the survey’s thirteen-quarter history.
Russell’s Australian Investment Strategist Andrew Pease said “What we are seeing here is a classic shift to defensive positioning by Australian fund managers. Managers are not expecting a rip-roaring bounce back from a 25 per cent drop in markets in March. Instead, they are re-positioning themselves to ensure stable earnings during continuing uncertain times,” he said.
The Russell IMO surveys Australian fund managers each quarter on their sentiments across a variety of investments, including local and international equities, listed property trusts, bonds and cash. 31 fund managers responded to the most recent June IMO survey, which provides one of the most comprehensive indicators of current market sentiment available in Australia.
Defensive shift sees slowing of resources boom
The June survey revealed that the resources boom is showing signs of lagging as profit-taking and reduced optimism start to take hold. The materials sector recorded a 39 per cent bullish to 54 per cent bearish outlook, which is a sharp reversal of results from last quarter that were 54 per cent bullish to 24 per cent bearish. This was similar to the energy sector with 44 per cent of managers holding a bearish outlook – the highest bearish result for this sector in the survey’s history.
Consumer staples (52% bullish) and utilities (46% bullish) are the two sectors that have bucked the bear trend, with fund managers favouring these sectors in uncertain times. Similarly, managers are moving towards the telecommunications sector this quarter, with 44 per cent bullish compared to 26 per cent bearish. This sentiment contradicts the gloomy outlook for the retail sector, with a record 70 per cent of managers bearish towards consumer discretionary.
“Australian investment managers are looking to those sectors that produce steady earnings amid the fallout from the global credit crunch and record oil prices. The weakness of the Australian dollar and the bearish attitudes toward materials and energy sectors, indicate the ‘commodity’ currency may have already experienced its high for the 2008 year. Also the RBA’s tightening of monetary policy motivated many managers to pull out of the consumer discretionary sector and move into consumer staples and utilities,” Mr Pease said.
The financial sector continues to be viewed as neutral among managers, despite the profit-taking from the materials and energy sectors. However, the gap between the bears (39 per cent) and the bulls (32 per cent) for the financials sector is lower than last quarter, with signs that the share price falls in this sector are starting to offer some value.
Small cap Australian equities continue to be out of favour with managers, which corresponds to a defensive shift by managers, with 71 per cent holding a bearish outlook, up from 63 per cent last quarter.
Uncertainty continues to dominate
The US market continues to wait for the cavalry in the form of federal government cash payments into the pockets of US families that will hopefully start a consumer lead recovery and soften the blow of an increasing widely held belief of a pending recession.
The June quarter IMO shows that Australian investment managers continue to hold defensive positions in a highly volatile market. Risk free cash yields of 7.25% remain attractive even as long-term value begins to emerge across other asset classes. Equity market sentiment is still overwhelmingly bearish with managers keeping a close eye on company profit warnings ahead of the reporting season due to start in earnest in August.
Outlook for 2008
The outlook for the remainder of 2008 appears flat, according to the June IMO survey, with 58 per cent of managers believing that the market offers only fair value. This sentiment is shared by US managers, with 53 per cent of US managers believing the market offers fair value. This is mainly due to a slowing economy, continuing uncertainty in credit markets, rising energy costs and rampant inflation.
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