Investors talk themselves into a funk

Australian investors seem certain to close out the year with their allocations set to conservative and with half an eye on a struggling Europe, but as Mike Taylor reports, the view from the US is far less pessimistic.

As the most recent research from Wealth Insights and data from Plan for Life has confirmed, Australian financial planners look certain to end 2011 dealing with clients who remain spooked by events in Europe and uncertain economic news coming out of the United States.

But there is evidence that the factors driving investor negativity in Australia are more imagined than real in circumstances where their counterparts in the US appear to have embraced a more optimistic outlook and, albeit cautiously, to have moved back into the market.

This became evident during a roundtable exercise conducted by Money Management and its sister publication Super Review in New York last week, and in meetings with investment market senior managers in both New York and Boston.

While the US investment managers acknowledge that there is some way to go before the US is thoroughly out of the woods, they broadly hold that the worst is behind them and that best interests are served by taking a more optimistic approach and adapting to what they say was the fundamental change driven by the global financial crisis.

What puzzles the US investment managers is the degree to which Australians have become spooked by events in Europe, in circumstances where there appears to be little correlation between the Australian economy and those in Europe.

They say that Australian investors – like many of those in the US – need to look to a decoupling which allows the Europeans to deal with their problems while the rest of the world gets on with seeking to drive growth.

Indeed, they are seeing positives in pursuing investment in the context of the strength which will be generated in both the US and emerging markets next year.

From almost the beginning of the global financial crisis, investment managers in the US and Europe have looked at the state of the Australian economy and expressed both admiration and envy for the position in which Australia finds itself.

As Bank of New York Mellon global markets strategist Jack Malvey made clear at last week’s New York roundtable, Australian investors would seem to have little to be concerned about, and little reason to have adopted an unduly defensive stance.

So what is driving the negativity which has seen financial adviser sentiment, as measured by Wealth Insights, and fund flows as measured by Plan for Life, in such conservative territory?

To a degree, there exists a perception that Australians and Australian investors have not coped well with the nation’s first minority Federal Government in more than half a century – something which has combined with negative economic news coming out of Europe and elsewhere to drive down investor sentiment.

The degree to which investor and industry sentiment has been impacted by the minority Gillard Labor Government in Australia was evidenced late last month during a Money Management roundtable held to consider the implications of the first tranche of the Government's Future of Financial Advice (FOFA) legislation.

What became evident at that roundtable was that financial services industry players were factoring in the inevitably of a change of Government at the next Federal Election and positioning themselves accordingly.

According to many of those who have discussed the issue with Money Management, one of the greatest challenges in dealing with the Government has proved to be the uncertainty around what will ultimately be delivered by the Gillard Government, and what might then survive the election or a Coalition Government.

While the US is facing its own electoral imponderables around Republican majorities in both houses and questions around the longevity of President Barak Obama, this did not emerge as a major issue in the minds of the investment professionals attending the New York roundtable.

Rather, they took the view that the US economy was beginning to move in the right direction and that, with the uncertainty generated by the political failure to find agreement around the debt ceiling behind them, there were no near-term major issues likely to significantly alter market sentiment.

For those looking at Australia’s economic position from the outside, few believe local investors have any reason to be as pessimistic as the most recent survey data and fund flows would suggest. 

They argue that Australian investors have little reason to be unduly worried about events in Europe, and that while Chinese growth may be more constrained in the future, it should still be sufficient to generate solid ongoing demand for Australian commodities.

Is it possible that Australian investors, confronted by negative news out of Europe and an indecisive political and policy environment at home, have simply talked themselves into undue conservatism?