Investor and consumer sentiment stubbornly conservative

Investment managers say it's anyone's guess when consumer and investor sentiment will shift away from conservatism, writes Caroline Munro.

Portfolio manager of Fidelity’s Australian equities team, Kate Howitt, says a preference for cash was to be expected after the large market movements over the global financial crisis. That conservatism will remain for some years, she adds.

“It’s entirely in line with previous downturns and recoveries,” she says, adding that the next couple of years after a rebound are a hard grind of smaller upwards movements.

AMP Capital Investors head of Australian equities, Greg Barnes, says there is still a high degree of caution and uncertainty among consumers, which is affecting the investment market.

Barnes says that while AMP Capital Investors focuses on stock-specific opportunities, consumer sentiment is a key concern when looking closely at underlying stocks and investment opportunities at that level.

He says consumers are still very cautious and uncertain, and in 2010, while people were expecting a much more buoyant market, there were well-documented shocks: such as concerns about a US double dip, sovereign problems in Europe, and a nagging concern that China was going to put a foot on the brake and slow its economy down too much.

“I think all of those issues made consumers cautious and concerned last the year, and I think that same caution flows through into the investment market,” says Barnes.

“Retail investors are really waiting for some clear air before they start to invest.

"We know that the savings rate is quite high at the moment, but retail consumers are not spending on the usual discretionary items — they are using a strong Aussie dollar to travel overseas, and they are buying cars and going to restaurants, but in terms of the more traditional consumer discretionary that underpins the economy they are just sitting on their hands at the moment.”

Russell Investments chief investment strategist for Asia Pacific, Andrew Pease, says the level of caution and conservatism could lead to individual investors and self-managed share investors potentially missing out on the upside, if they have not already done so.

However, ongoing volatility would naturally keep investors cautious, says Howitt.

“Fundamentally you’ve got some problems in the Western world and the resolution of that is going to take a long time to unwind,” she says. “So economic conditions will be more volatile than we’re used to, and therefore investor sentiment will be more volatile.”

Morningstar co-head of research, Tim Murphy, said the effect of policy decisions, such as the flood levy and interest rate rises, would take some time to flow through to the economy — but it is something the researcher is keeping an eye on.

Barnes agrees that interest rates would be another key driver for the year ahead. While things will be on hold for the time being, investors remain cautious and are watching how that unfolds, he says.

“I think the consensus is that as we move further through this year we will see further increases in interest rates. But it’s more the change in interests rates rather than the level that has an effect on people’s behaviour — until there’s some stability or some clarity around that, I think people will remain a little bit cautious,” Barnes says.