Investor sentiment due for a cold snap

With market economists pointing to the existence of a ‘wall of worry’ built on bad economic news out of Europe and the US, Mike Taylor writes that advisers will need to guide clients through a winter of discontent.

Research conducted by specialist research firm Wealth Insights over the past five years has revealed financial planner sentiment is very often a direct reflection of client sentiment (which, in turn, appears to be closely correlated with the fortunes of the Australian Securities Exchange).

That being the case, we should expect that when Wealth Insights next releases its Adviser Sentiment Index it will have moved further downwards on the back of the relatively poor performance of the ASX200 over the past three months.

But there are other more concrete measures of investor caution in Australia than the Wealth Insights data, with the most obvious being those compiled by Plan for Life with respect to fund flows. On all the available evidence, the next Plan for Life data will confirm that an awful lot of Australians are leaving their money in ‘safe-harbour’ investments such as cash and term deposits.

With the European debt crisis still in a state of flux and new data emerging from the US to suggest that its economic recovery has stalled, it seems entirely possible that Australian financial planners are about to witness a winter of discontent among their clients – something that is unlikely to be alleviated by uncertainty which goes with the rarity of having a minority Government sitting on the Treasury benches in Canberra.

According to some analysts, while the negative news emanating from Europe and the US is playing its part in dampening investor sentiment in Australia, so too is the generally negative news and debate issuing out of Canberra.

AMP Capital Investors senior economist Bob Cunneen recently made reference to a “wall of worry” when describing investor perceptions of the economic situation both within Australia and abroad.

Describing the outlook for markets in early June he said this “wall of worry” comprised a range of concern such as softer global growth, America’s struggling housing market, Japan’s recession, China’s inflation risk, high oil prices and Australia’s multi-speed economy.

“All remain constraints on global share markets in the short term,” he said.

In doing so, Cunneen reflected a view widely held by market economists – that the current adverse sentiment is going to last a matter of only months and is, as described by HSBC strategic, Garry Evans, “a wobble in an uptrend”.

But the question confronting Australian investors and, by definition their financial planners, is how long the “short-term” issues are going to constrain their asset allocations.

According to Evans and a number of other economists and analysts, the current problems will probably persist through the northern summer, with earnings being revised down and investors becoming more worried about the risk of a new recession.

“The time to buy back is probably when capitulation sets in,” the HSBC analysis said. “In the meantime, we continue to recommend relatively defensive positioning.”

AMP Capital’s Cunneen takes a similar view, suggesting earlier this month that the medium fundamentals for global shares are encouraging with the possibility of “an eventual price revival later this year”.

“However, investors will need to see that the ‘wall of worry’ list diminishes to regain confidence,” he said.

A broader and more global view is provided by the highly experienced chief economist for Bank of New York Mellon, Richard B Hoey, who has described the world economy as being in “the mid-cycle phase of a sustainable global economic expansion”.

Hoey who, in 2007-08 told Money Management that the recovery from the global financial crisis would be one of the longest and slowest on record, said in his most recent analysis that he expected cyclical expansion to be sustainable “even as many economies experience a short sub-cycle slowdown”.

So the bottom line for Australian financial planners is that not only are they going to have to maintain their focus on the regulatory changes emanating out of the FOFA changes, they are going to have to keep a weather eye on markets and the degree to which their clients feel burdened by a “wall of worry”.

On the plus side, most superannuation fund returns appear likely to end the financial year in the black, allowing advisers to deliver an element of good news as they await more positive indicators, both from the economy and the markets.

Most will be hoping that, consistent with the predictions made by HSBC, Australia’s gloomy winter will give way to some positive news in spring.