Global markets underestimated
International equities, across all geographical locations, will be the big performers in 2005 according to Perpetual’s Brigette Leckie, who said that some world markets are currently under valued by up to 40 per cent.
Leckie's optimism comes despite poor recent market performance over the past two months in the Australian stock market and other world markets.
This poor performance has been pinned on a spike in oil prices which has caused fears of an inflation hike and a drop in consumer confidence. Some in the United States are even fearing the dawning of a recession.
But Leckie told delegates at the Securitor conference at the Gold Coast these fears where “grossly over stated.”
“Today what we're seeing is all blocks are growing. We'd argue that Japan has addressed some problems and will grow from here. Europe finally 18 months ago bit the bullet and also started to post some solid growth. And emerging markets are also growing strongly for various reasons.”
A great deal of economic growth around the world could be attributed to what Leckie called the China syndrome, where inflation is kept low by the importation of ultra-cheap massed produced goods in China, and, in the future, other developing economies such as India and Indonesia.
She also produced data that showed debt to earnings ratios of corporations around the world were in the best shape they have been in since world war two.
"That means that corporates are very well placed to start spending more and more on investments," she said.
With these healthy cash/debt ratios combined with low interest rates and inflation being in a “sweet spot” of between two and three percent, Leckie said that company's on the US S&P 500 index were undervalued by 12 to 15 per cent. This could translate into a gain of 15 per cent on US markets this years she said.
The situation elsewhere is even better with Japan under valued by 30 per cent, Europe by 22 per cent and emerging Asian markets by 40 per cent.
As for Australia, Leckie said the market probably peaked in 2004, so she did not expect any further market growth. She said she expected returns in Australia, thanks to continuing demand from China, to sit in the low double digits.
But she also claimed that Australia's gross domestic product would not pick up until it addressed infrastructure bottle necks and the current skills shortage. As a consequence, Leckie argued that investors should tip their portfolios towards international rather than Australian stocks this year - particularly in the infrastructure and energy sectors.
"The bottom line is that the global back drop is looking pretty solid, and I think in the environment it comes back to diversification across different geographical regions."
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