By Ross Kelly
ZurichFinancial Services has joined the chorus of local fund managers urging Australian investors to look to offshore equity markets for outperformance in 2006.
“The Australian market is at all-time highs, but if you look at the other markets they are 20 to 30 per cent below their highest recorded index levels,” Zurich investment specialist Peter Walsh said.
“Last year the Dow Jones hit 11,000 points, which is obviously a pretty high level, but it’s still 6 or 7 per cent off its record highs.
“Japan is still over 50 per cent off its peak. People have ignored Japan for a long time. They’ve ignored international shares for a long time — since they had a shocker in 2000. Clearly it’s time to return.”
Walsh said global markets including the US, Japan and Europe have strong potential to reach record index highs because price to earnings ratios for these markets are still relatively low.
“Look at PE [price earnings] around the world. Europe is 12 to 13 times earnings, the US is about 15 times earnings, which is the cheapest it’s been for close to a decade and underpinning that, the companies are cashed up. Even Japan is 18 times earnings, and for Japan that is very, very low.”
Walsh’s comments follow a report released three weeks ago by asset consultants Russell, which found 67 per cent of local fund managers were bullish on international equities, up from 51 per cent last year.
Russell’s survey also found managers that believed the Australian equity market was expensive outnumbered those that believed it was undervalued by almost eight to one.
Benchmark returns for the Australian equities market for the 2005 calendar year were close to 23 per cent, while international shares, according to the MSCI World ex-Australia Index, returned close to 17 per cent.
There are still plenty of fund managers and economists who favour Australian equities over other asset classes in 2006.
“The PE discount for Australian shares of the past is no longer justified and Australian shares are likely to continue to outperform international shares,” AMP chief economist Shane Oliver said.
Oliver said that over the past decade Australian listed companies had generated better earnings growth than global shares, despite paying out a higher proportion of earnings as dividends.
