Mercer Investment Consulting has revised down its view of global equities markets, suggesting the rally has pushed prices to fair value from their previous rating of undervalued.
A Mercer report on Dynamic Asset Allocation (DAA), which draws upon Mercer research in the US, UK and Australasia, says: “Whilst we accept that equity markets may outperform their long-term assumptions in the short-to-medium term, we feel that the risks to them achieving this are elevated and have revised the view of the asset class back to a neutral level.”
DAA refers to a service which provides advice on medium-term asset allocation (in between strategic at the long end and tactical at the short end) and combines Mercer views on valuations, momentum, sentiment and liquidity which may influence market returns.
Simon Calder, a principal in the Mercer Melbourne office, said that with the latest quarterly view, the Mercer analysts in Australia agreed with their US counterparts that global equities were no longer undervalued. In the previous review the Australians had maintained an undervalued rating for global equities because they felt that momentum factors would push prices a little higher (which turned out to be correct for Australian investors despite a firming Australian dollar).
The consistent Mercer view also is that global sovereign bonds (hedged) are overvalued, while global credit remains at fair value).
For other international shares, Mercer sees both global small caps and emerging markets as neutral. Small caps are being supported by improved consumer confidence and better credit conditions but valuations appear reasonable rather than compelling. Emerging markets have strong economic prospects but this is offset by high price:earnings ratios and price-to-book valuations.
Emerging markets turned out to be the star performers for 2009, beating their developed market counterparts by about 35 percentage points on average, in local currency terms, over the calendar year. The top performer was India, up 92 per cent in local currency terms, with other BRICs (Brazil, Russia and China) also having strong performance.
Mercer has a negative medium-term view on the Australian dollar versus the US dollar.