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Russell Investment Group is urging investors to hold their nerve in the face of survey data revealing that Australian fund managers are becoming increasingly cautious about the outlook for global equity markets, as conditions worsen in Australia and offshore.
Russell chief investment officer for Asia Pacific Peter Gunning says despite this softening, investors need to keep their nerve in what is an increasingly volatile market environment.
“Markets will always fluctuate and investors need to ensure they retain a disciplined, long-term investment approach in the face of recent changes,” he says.
Gunning says the fall in sentiment is the result of a range of challenging market conditions, with current market anxiety being based on concerns over rising inflation, excessive central bank tightening and a slowing US economy.
He says closer to home, tight labour markets and rising inflation have pundits closely watching the next moves by the Reserve Bank of Australia.
The Russell survey — the June 2006 Russell Australian Investment Manager Outlook — says the improving outlook for international equities seem to have finally turned around.
It says following three consecutive quarters of increasingly bullish sentiment, the June 2006 results finally show a reversal of this trend. Despite this shift, international equities still remain the most favoured asset class among investment managers — for the fifth quarter in a row.
The survey of 45 senior level decision makers at Australian investment management firms found 58 per cent of managers are now bullish on the 12 month outlook for international equities, down from 80 per cent in March.
Interestingly, 24 per cent of managers hold a bearish outlook for this asset class, compared with just 4 per cent during the previous quarter.
While managers are divided on the outlook for Australian broadmarket equities, the survey says sentiment has been trending bearish over the last three quarters. As of June, 42 per cent of managers were bearish, up from 31 per cent last quarter.
The survey says domestic share market valuations have polarised somewhat since March, with 47 per cent of managers judging the Australian equity market to be ‘overvalued’ at current levels. Thirteen per cent consider it ‘undervalued’, and 40 per cent ‘fairly valued’.
It says managers were most bearish on small cap Australian shares, with 64 per cent expressing a negative outlook towards this sector. This broke the trend of managers becoming less bearish on small-caps since June 2005.
The analysis says managers remain bearish on Australian bonds (56 per cent), although less than last quarter (70 per cent) and less than this time last year (76 per cent).
Bearish sentiment also exists for Australian Listed Property Trusts (49 per cent), but also less so than last quarter (57 per cent) and June last year (69 per cent).
Meanwhile, the survey says manager outlook for the $A vs $US has again shifted significantly, with 41 per cent being bullish — compared with 26 per cent last quarter and 21 per cent in June last year.
Among sectors, managers show a preference for consumer staples (55 per cent bullish), energy (50 per cent bullish) and materials (45 per cent bullish).
Managers are most bearish on telecommunications services (50 per cent), industrials (45 per cent), and consumer discretionary (45 per cent).
The outlook appears divided for financials and healthcare.
As part of the survey, managers were asked to predict the oil price at the end of 2006. While predictions range from US$55 to US$100, the average and most common responses indicate that investment managers, in aggregate, expect the price of oil to be worth US$70 per barrel at December 31, 2006.
AUTHOR
Mike Taylor
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