Eyes turn offshore: domestic equities less attractive in 2005-06

Domestic equities may have driven double digit superannuation returns in the current financial year, but Australian investment managers are looking to international equities as the likely strongest performer in 2005-06, according to a survey conducted by Russel Investment Group.

The survey, published in late June shows, that nine out of 10 managers surveyed believe the Australian equities market is currently “fairly valued” or “over-valued”, reinforcing the need for investors to look offshore for returns.

The Russell research is based on feedback from more than 40 Australian-based investment managers and was conducted during the first half of June.

Commenting on the survey outcome, Russell’s chief investment officer, Asia Pacific, Peter Gunning said the research indicated that Australian small caps and listed property trusts would bear the brunt of shifting investor sentiment over the coming year.

“Sentiment has become most bearish at the small end of the market, which has outperformed its large capitalisation counterpart for the past three years,” he said.

The survey itself summarises its findings by saying that managers are clearly convinced that the markets will turn away from an environment that has favoured domestic listed property trusts and small cap Australian equities to one in which international equities will perform strongly.

A measure of this belief was that 67.6 per cent of respondents gave a bearish assessment of LPTs, 72.7 per cent bearish about small cap domestic equities, and 74.4 per cent bearish about domestic bonds over the next 12 months.

This compared to their view of international equities, with 48.4 per cent indicating they were bullish.

Looking at market sectors, the Russell survey said that 58.5 per cent were bullish about energy, 56.1 per cent were bullish about healthcare and 52.5 per cent were bullish about materials.

It said that bearish sentiment among managers was strong in the area of consumer discretionary industries and industrials, and moderate with respect to telecommunications services.

The survey suggested that recent strong economic growth in China was affecting managers’ investment strategies, with almost two-thirds reporting it as having a moderate or high impact on their decision-making.

Giving his analysis of the survey findings, Gunning said that the assessment of investment managers was hardly surprising given the strong returns investors had enjoyed in Australian equities over the past two years.

“The major theme currently dominating sentiment is a belief that a significant amount of good news has already been priced into the market,” he said. “With the prospect of moderating economic growth — particularly concerns over consumer spending and a slowing housing market combined with an expectation that interest rates are unlikely to fall for the foreseeable future — prevailing sentiment is now more cautious towards the domestic equity market.”

Gunning pointed to the fact that sentiment had become most bearish at the small end of the market, which had outperformed its large capitalisation counterpart over the past three years.

He said that within equities, investors were typically well-disposed to the health care and energy sectors, while typically eschewing the industrial and consumer discretionary sectors.

“This is consistent with the majority view that economic growth and consumer spending in particular are likely to moderate over the next 12 months,” Gunning said.