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(August-2004) Driving returns: But will double digits hit a dead end?
Resurgent equities were the primary driver behind the double digit returns being enjoyed by the bulk of Australian superannuation funds last financial year, but the looming US election and a range of other uncertainties mean few people believe they will be a driver for a second consecutive double digit year.
The strength of the recovery in 2003-04 surprised almost everyone, with Australian equities running at an all time high.
Overall, Australian equities returned around 12.5 per cent, double that of international equities, which returned 6.5 per cent in Australian dollar terms over the same time period.
And while there is general optimism about market conditions moving forward, few are suggesting they will be sufficient to deliver a second consecutive year of double digit returns.
David St John, chief investment officer of UniSuper Management feels we may have witnessed the best in equity markets for now. “We are cognisant that markets have run hard, pricing in much of the good economic news out of the US and elsewhere. Overall, we do not expect double digit returns to persist.”
Hanns Kunnen, head of investments at Colonial First State agrees that US profit growth is decelerating.
“US profit growth has been astounding, but growth has been at a pace that cannot be sustained,” he says.
Yet he feels there is no need for investors to worry. “Really, the US market is fine, but because it came out of recession, everything expanded quickly. Things can’t continue doing that and they’ll get back to single digit figures.”
So what does this mean for the coming year?
With the build up to the US election in early November, the outlook for US markets may be clouded as it looks like being a close contest.
US company, Crown Agents Asset Management, suggests the US presidential election has not created much interest in currency markets so far. However, equity markets do not like uncertainties created by the close nature of the polls.
In the short term, this uneasiness has extended to Australian investors, many of whom are looking to offshore markets to bolster returns for the next 12 months.
AMP Capital Investors head of investment, Shane Oliver has some concerns on the issue.“I think the main reason why I’m a bit concerned is because it’s so close. Now, I’ve seen surveys of US based investors, and 80 to 90 per cent of them expect Bush to win. Whereas, when you look at the polls, its all very close.
“I think, as we get closer to the poll which is on November 2, the market will start to focus more on the prospect of a Democratic victory and it normally creates a degree of uncertainty and nervousness.”
Kunnen feels that the build up to the election will not affect the market greatly. “The focus should be and will be on profits and interest rates. It’s perceived that Bush might be equity positive because of his spending programs, whereas Kerry is perceived to be bond positive because of his desire to pull back on some of the tax cuts.”
“I think, ultimately, whether Bush or Kerry wins, it doesn’t really matter for the US equity markets,” Oliver believes. “At the end of the day, the last 75 years or so actually suggests that US share markets will do slightly better under a democratic government presidency than under a republican presidency. The worry in the short term, though, will be that the Kerry administration will be less business friendly and we might see an attempt to repeal the cuts in dividends and capital gains tax last year and that would be taken negatively by the market.”
Reports from USA Today, however, feel that a Kerry victory will be better for the market. They say that the arrival of new presidencies have generally proven better for equity markets.
So what does all this mean for the market closer to home? With Australian investments relying heavily on world equity trends, we may see some uncertainties over the coming months as well . Yet, Australian investors feel it is unwise to speculate at the moment. “In Australia, the best thing to do is to focus on what’s happening here and company profitability,” says Kunnen.
Oliver is also optimistic about not being completely dragged down by the uncertainties in the US.
“The Australian market can go in its own direction. As we’ve seen this year, the US market has been pretty flat for the year whereas the Australian market is actually up, at that level. So we can go in a different direction, month to month, week to week,” he says.
However, he does have some speculations about election time. “That would be compounded by the fact that we’ve got our own election coming up at the same time. And the issues are almost exactly the same.”
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