Investors should maintain an overweight position in global equity markets relative to overvalued bonds, according to Mercer.
Head of Mercer’s Dynamic Asset Allocation team in Australia and New Zealand, David Stuart, said despite the shake-up caused by world events in the first quarter of the year, global equities had proved resilient. Mercer was advocating an overweight position in global shares relative to “overvalued” bonds, he said
“With the exception of Japan, which has fallen nearly 10 per cent since our last report in January, major equity markets have delivered positive returns, led by the S&P500 rising 3.6 per cent. Given the backdrop of the Japanese earthquake, political turmoil in the Middle East and North Africa, resurgence of European debt worries and rising inflation pressures in major developing economies, this is a resilient performance and a promising sign for investors,” said Stuart.
He warned that the rally in the Australian dollar compared to a weak US dollar has left the Australian currency exposed. Mercer has therefore remained a medium term biased towards overseas currency exposed assets, which should remain overweight, he stated.
“With the Australian dollar at a post-float high against the US dollar close to US$1.10, we are currently experiencing a sweet spot of strong commodity prices and rising interest rate differentials. However, this strength will be hard to sustain once US interest rates begin to rise, and there are downside risks to commodity prices in the medium term,” said Stuart.
“This isn’t expected to happen until 2012, but if the US dollar turns, it could also impact commodity prices and put significant downward pressure on the Australian currency over the next one to three years. Therefore we have placed a very conservative valuation on currency, shifting from unattractive to very unattractive.”
