Friday, December 18th, 2009

• Three out of four fund managers optimistic about domestic equities in 2010
• Bonds, A-REITs sentiment hit by increasing interest rates
• Opinion divided on strength of Australian dollar

A growing number of Australian fund managers have a bullish outlook for domestic shares in 2010 with 73 per cent bullish and 54 per cent expecting the local market to grow by over 10 per cent in 2010, according to the latest Investment Manager Outlook (IMO) from Russell Investments.

Russell Investments surveyed 44 leading Australian fund managers for its latest quarterly Investment Manager Outlook – one of the most comprehensive indicators of local investor sentiment available. The survey shows that fund managers largely see the local share market as fairly priced, although there is a minority of 16 per cent who see the local market as overpriced. The proportion of surveyed managers who saw the market as cheap has fallen from 59 per cent in March to 18 per cent in December, directly inverse to the rally in the Australian stock market this year. However, the majority of managers still see that market as representing fair value.

Russell Investments’ Associate Portfolio Manager Scott Bennett says the continuing bullish sentiment reflects the fundamental strength of the Australian economy.

“Managers appeared unmoved by the recent stall in Australian share performance. Longer term expectations are firmly focused on the positive prospects for our market and its fundamental resilience,” Mr Bennett said.

“Most managers are showing a strong preference for local shares, with international shares strong as well. A minority of the surveyed managers are bearish on the future outlook for domestic equities, and this may reflect uncertainty over the strength of the economic recovery, particularly in our major trading partners,” Mr Bennett said.

Expected to perform strongest are industrial stocks, with 84 per cent of managers expecting an increase in their value over the year, up from 69 per cent last quarter. The anticipation of further interest rate rises has resulted in a fall in sentiment in the consumer discretionary sector, with 30% of managers now bearish on the sector compared to 9% in the previous quarter.

“Although the outlook is still positive, sentiment towards the consumer discretionary sector has waned considerably as investors begin to factor in the potential impact of higher mortgage repayments on consumer spending,” Mr Bennett said.

Cash outlook strengthened by RBA rises
Recent interest rate increases from the RBA have helped the outlook for cash, with the bullish view for cash having quadrupled to 32 per cent in the last quarter.

“Cash, while not quite king, certainly improved its standing among managers. The prospect of rising yields with no corresponding capital losses is proving very attractive,” Mr Bennett said.

Correspondingly, the increase in interest rates have seen sentiment shift towards cash and away from Australian bonds. The IMO’s view on bonds was decidedly sombre compared with other asset classes, with 71 per cent of investment managers bearish on the outlook for Australian bonds over the next 12 months.

The view towards A-REITs was similarly dismal, with the bearish view almost doubling from 23 per cent to 42 per cent despite the ongoing economic recovery.

“Although Australian real estate trusts have taken large steps to deleverage their balance sheets through 2009, they still remain relatively highly geared and sensitive to increases in interest rates,” Mr Bennett said.

Aussie dollar in balancing act
Feelings as to the direction of the Australian dollar were mixed. Fund managers have split into opposing camps, with 38 per cent predicting no further increase in the dollar with the same percentage predicting further growth.

“What we are seeing is a clear dichotomy forming. This divergence is largely centred on the outlook for growth of the US economy.” Mr Bennett said.

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The latest Investment Manager Outlook (IMO) from Russell Investments - PDF for download below.


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