Uncertainty in major markets around the world will keep share valuations grounded, with only modest growth expected in 2010, Russell Investments has predicted.
The firm has predicted that while Australia is likely to continue its relatively strong economic growth, the investment market will have a significantly smaller upside due to its already solid performance. Russell also expects local shares to be relatively modest.
“It really is a case of less pain, less gain,” said Andrew Pease, investment strategist at Russell. “Australia escaped the worst of the global financial crisis due to a combination of circumstances and we’ve bounced back rapidly.”
Pease added: “Price/earnings ratios in the Australian market have already priced in an expected rebound in corporate profits. Growth in valuations from here will depend on a growth in earnings, where we have much less potential for an upside than in the US,” he said.
While the threat of a double dip recession has faded, the US economic recovery is expected to be a protracted process as households deleverage and fiscal stimulus winds down, Pease added. In addition, continuing efforts by banks to clean up their balance sheets will also keep a question mark over the robustness of the economic recovery. He pointed to the fragile state of the US banking system as the main impediment to a strong recovery, and added that a V-shaped economic rebound is unlikely.
Pease stressed that a V-shaped recovery could cause problems of its own, and a rapid recovery in the US economy could stoke further concerns about the Fed’s easy money stance and lead to long-term interest rates. Instead, a deep U-shaped recovery from recession is likely to be prolonged while the deleveraging process occurs.
Back home, the Australian dollar is unlikely to see further growth and is sitting at an extreme valuation against the US dollar and the euro, Pease added. However, many of the factors that drove the Australian dollar higher — such as a rebound in risk assets, widening interest rate differentials and the rebound in commodity prices — now look less supportive.
Pease also pointed to the optimistic assumptions about commodity prices, with Australian resource stocks priced at an average of 19 times forward earnings.
