Tread with caution, advisers warned

Advisers must not be over-optimistic about the state of the Australian economy and share market, according to the chief investment officer of Russell investments, Andrew Pease.

Speaking at the Russell Investment Summit in Melbourne, Pease warned the audience there was a sense of over-optimism building up about Australian share markets, and while it was “amazing” that Australia had managed to avoid a downturn, a recession would inevitably occur.

“I’m worried about some of the over-optimism, or some of the relative optimism about Australian share market prospects relative to the rest of the world,” he said.

Pease also warned Australia could follow in the footsteps of the Netherlands in the 1970’s after their oil and gas discoveries and end up “sucking workers” from the rest of the Australia’s economy into the commodities sector.

“Because the energy sector was so strong [in the Netherlands] it started sucking workers out of the rest of the economy, so anyone who wasn’t involved the industry sector were being hit by rising wages because they had to hang on to their workers, and they were being hit by an uncompetitive exchange rate.

“If you talk to people across the economy now, in the tourism sector, or the manufacturing sector, a sustained Aussie dollar is hurting. In Perth, it’s getting hard to employ taxi drivers and waiters because there are better opportunities in the resource sector,” Pease said.

If the commodities boom was sustained, a big adjustment would be needed in terms of the “exchange rate pain” and across the rest of the economy, he said.

High commodity prices could also drop as supply expands to catch up to rising demand from the emerging markets, Pease said.