Domestic equities looking over-valued: Russell

Domestic equities may have driven double-digit superannuation returns over the past two years, but investment managers are becoming increasingly concerned they have become over-valued.

That is the bottom line of research released this week by Russell Investment Group.

Based on the feedback of 50 leading Australian-based managers during the first half of September, the survey found that while the Australian market was reaching all time highs during the September quarter, investment managers were baulking at the prospect of ongoing strong relative returns.

It said that while 50 per cent of managers surveyed still believed the Australian equities market was fairly valued, 46 per cent believed the market was now over-valued — up 35 per cent over the previous quarter.

Russell’s chief investment officer, Asia Pacific, Peter Gunning said the results reflected an unusual imbalance in forecast price to earnings ratios.

“Putting current Australian equity valuations into context, the price to earning ratio of the domestic market on a one-year forecast basis is 17.9,” he said.

“Traditionally, the Australian equity market trades at a reasonable discount to world markets, not at a premium.”

Gunning said if the pundits were correct, it was difficult to see the domestic market performing as well as it had relative to global markets going forward.