A majority of Australian-based investment managers believe international equities will be the strongest performing asset class over the next 12 months.
At the same time, 90 per cent of the managers surveyed in the inaugural Russell Australian Investment Manager Outlook believe the Australian equities market is currently ‘fairly valued’ or ‘overvalued’.
More than 40 Australian-based managers were surveyed during the first half of June 2005 for their thoughts on various asset classes and sectors, as well as on topical macro-economic drivers.
The survey reveals managers are sanguine over the outlook for domestic equities after their strong performance in the 12 months to May this year, according to Russell chief investment officer for Asia Pacific, Peter Gunning.
Less than 10 per cent of surveyed investment managers believe Australian equities are undervalued at current valuations, while more than one-third believe the market is overvalued, Gunning said.
“Those investors who believe investment managers’ perspective are valid may consider shaking off their affection for domestic asset classes, and rebalancing their portfolios to international asset classes.”
“Managers believe that some of the best investments currently lie outside Australia, with international equities standing out as their most favoured asset class.”
The surveyed managers believe Australian small-caps and listed property trusts will “bear the brunt of shifting investor sentiment over the coming year”, Gunning said.
Nearly three-quarters of surveyed investment managers are ‘bearish’ on small-cap returns over the next 12 months, while more than two-thirds of managers are ‘bearish’ on the listed property trust (LPT) sector, with less than 10 per cent ‘bullish’.
Gunning attributed the change in LPT sentiment to an “exceptionally strong performance run combined with a slew of corporate actions, a high stock-specific concentration in the sector and a growing international LPT market”.
About 80 per cent of surveyed managers were also found to be ‘neutral’ or ‘bearish’ on the outlook for the Australian dollar versus the US dollar.
On the interest rate front, most managers expect interest cash rates to remain unchanged for the foreseeable future following the Reserve Bank’s raising of official cash rates from 5.25 per cent to 5.50 per cent in March.
The same cannot be said for Australian bond returns, about which managers have the “most bearish view” of all asset classes, Gunning said.
Three-quarters of respondents are ‘bearish’ on the outlook for domestic bonds, he said, “potentially reflecting a combination of local and global inflationary pressures, and credit spreads falling to historically low levels”.
Within equities, managers remain most ‘bullish’ about energy (58.5 per cent), health care (56.1 per cent), and materials (52.5 per cent).
Sectors about which managers are ‘bearish’ include consumer discretionary (67.5 per cent) and industrials (52.5 per cent).
The importance of China’s economic growth in the region “continues to play heavily” on managers’ minds, according to Gunning.
Two-thirds of respondents indicated that China has a moderate to high influence on their current investment strategy.
