A strong performance from Australian equities over the last 12 months suggests intense speculation about a prolonged downturn is not necessarily justified.
Research from a number of sources indicates that returns for the 2005-06 financial year will be around 13 per cent, despite negative returns in May and June.
“This year is still shaping up to be a double-digit year for growth funds,” says Andrew Korbel, senior consultant with Intech Investment Consulting.
According to Intech’s research, Australian equity funds returned 26 per cent for the 2004-05 financial year, and 21 per cent for 2003-04. “And our best guess for the year to date is just under 13 per cent,” Korbel says, irrespective of the negative 3 per cent return for the June 2006 quarter, and a similar result for the three months to March.
When asked what has been fuelling speculation about a decline in the domestic market over recent years, Korbel gives a blunt response. “It’s fear and greed — it’s been too good for so long, but we don’t see anything [that is] radically different than before.”
In line with this thinking, he says Intech has not been advising clients to make any significant change either way. “We have been simply saying to re-balance, recommending a close to even split between Australian and international shares,” he says.
Other asset consultants, including Russell Investment Group, have been advising clients much the same way. “We set a strategic asset allocation [and recommend] re-balancing rather than short-term tactical changes,” says Peter Gunning, chief investment officer of Russell Investment Group. This is despite the Russell Investment Manager’s Outlook surveys for the last two quarters suggesting a lack of confidence in continued high returns from the domestic market.
This time last year, research from Russell Investment Group indicated that in the following 12 months fund managers expected the international equity market to drastically outperform its domestic counterpart. Based on feedback from over 40 Australian-based investment managers, nine out of 10 believed the Australian equities market was either “fairly valued” or “over-valued”.
The latest Russell Investment Managers Outlook survey for the June 2006 quarter shows increased bearishness toward Australian equities relative to the March 2006 quarter. This was accompanied by a massive 22 per cent reduction in their bullishness toward international shares, with enthusiasm for international shares falling from an unprecedented 80 per cent last quarter to 58 per cent this quarter.
Gunning describes the 80 per cent bullishness indicated in the March quarter as “probably an outlier”. “Sentiment got ahead of itself; bullishness [for international equities] is now not nearly as extreme as it was,” he says.
It is widely accepted that a high-performing Australian commodity cycle has been behind the impressive returns delivered by domestic equities over the last two years. “Resources have helped push us ahead of the international [sector],” Korbel says. “[Australian] gross domestic products growth has been higher than the world average for some time.”
The ongoing strength of Australian resources depends largely upon two factors: the stability of the local economy and the demand for our exports. Because of the extended period of economic growth enjoyed by the Australian economy, and the two Reserve Bank of Australia interest rate rises this year, there is some suggestion that we are nearing the end of the peak.
Questions have also been raised about whether the high international demand for large-cap domestic commodity stocks like BHP Billiton and Rio Tinto are sustainable in the long term.
Like many in the industry, Frontier Investment Consulting had expected a return to volatility sooner rather than later. “We’ve seen clients weighting away from domestic equities over the last 12-18 months, but unfortunately many did this too early,” says Fiona Trafford-Walker, chief executive officer of Frontier.
“Market performance is difficult to predict over the short term, and Australian equity performance has proved that point,” Trafford-Walker says. She also explains that Australian resources have given a 70 per cent return in 2005-06, and only recently experienced a fall, having “unravelled slightly” in the last six to eight weeks.
Garrie Lette, Australian head of research at Mercer Investment Consulting, agrees that the performance of Australian equities hinges largely on Australian commodities, but does not see this as a cause for concern. “There are some sections that had been overheated, such as resources,” he says. “There has been some surprise that Australia has performed so well for such an extended period, but what we hear from our [fund] managers is that it’s a short-term, healthy retraction, rather than a long-term decline.”
Up to May 31, 2006, Aberdeen Asset Management’s Australian Equity Fund (AEF) returned an impressive 29.2 per cent, some 10 per cent higher than the 19.58 per cent return of their International Equity Fund. “We’ve seen a strong run on the back of robust resources,” says Stuart James, Aberdeen’s associate director.
While the weaker performance of Australian equities over the last month reduced the annual return figures of the AEF, “over 12 months the Aussie is still outperforming the international”, he says. “The more traditional international markets of the US and Europe haven’t really excited — they’ve done nothing that is not achievable domestically.”
According to James, there has been concern among their financial planners about the sustainability of bullish domestic equities, but this hasn’t brought a dramatic shift from domestic to international.
David Hutchison, investment research manager at MLC, echoes James’ sentiments. With the exception of re-balancing, which for them is only a shift of 2 per cent either way, MLC has made no recent changes to their split between Australian and international shares within their balanced and growth funds. “We don’t use a tactical asset allocation within our diversified super funds because we do not believe that anyone can consistently correctly identify and predict short-term market trends,” Hutchison says.
The only significant adjustments made since 2000 relate to interest bearing assets and the addition of a global category to the listed property sector, which reduced exposure to Australian property from 100 per cent to 75 per cent.
John Paul, general manager of Asset Super, confirms that their approach is much the same, with no major changes in the last two years. The Asset Super growth fund, with 78 per cent allocated to equities, comprises 40 per cent Australian and 38 per cent international. In consultation with their asset manager, Asset Super’s next review will take place after June 30 this year. “We’re not seeking to change from growth to defensive,” says Paul. “We’re very happy with our performance, 12.62 per cent for the year to date, which went as high as 20 per cent on May 11.”
