Advisers warned to temper their expectations
Expectations of a global growth recovery and high earnings are too optimistic, according to Treasury Group fund managers.
Hugh Giddy of Investor Mutual Limited, Craig Connelly of AR Capital Management and Frank Villante of Celeste Funds Management — all of whom sit within the Treasury Group portfolio — agreed that earnings expectations were too high and there were a number of constraints to growth.
Giddy and Connelly were concerned about the next round of quantitative easing in the US, which they felt was a signal of constrained growth in an economy so dependent on consumer consumption.
Giddy said there were pressures on company earnings, with one of the main issues being too much debt and leverage in the world economy.
“It’s not back to the salad days before the credit crunch hit,” he said, adding that consumers were tightening their belts in the face of increasing interest rates and no more Government stimulus payments, while there was a reluctance by the banks to issue mortgages or lend to businesses. He added that banks also faced low credit growth and higher funding costs overseas.
Giddy said in terms of the share market, optimism was high and he felt it was a bad time to buy — especially in light of recent Government action.
“The market environment is actually somewhat dangerous at the moment because there are high expectations and you’ve got this idea that people feel that they can never lose because they think the Government is going to ensure that they don’t,” he said.
He also felt that overseas investors were likely to “sell in droves” should the Australian dollar retreat.
Villante said Australian corporates were adjusting earnings expectations downwards.
“It’s very much an issue of sales and revenue — it’s an anaemic revenue environment,” Villante said.
Connelly said that for markets to move higher, there would have to be a sustained improvement in underlying activity that translated into earnings growth, sustained current valuations and facilitated price-to-earnings ratio expansion.
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