Asset consultants Russell Investments and State Street Global Advisors (SSgA) are both bullish on the Australian economy and equities, in particular, with Russell tipping industrials and a return of 10 per cent this year.
Industrials will be the clear favourite with fund managers, said Russell’s associate portfolio manager, Scott Bennett, while telecommunications and utilities will languish.
SSgA’s chief economist, Christopher Probyn, predicted that the local economy would grow 3 per cent. Inflation may rise to 2.7 per cent but would stay in the Reserve Bank’s target zone for the medium-term.
Both Russell and State Street said the recovery would be a robust V-shape, or a lacklustre U due to the longer-term fallout from the financial crisis.
Shares, both local and overseas, would continue to be the favoured asset class, according to Russell’s Bennett, with funds neutral on A-REITs and cash, and bearish on Australian bonds. Bennett’s comments were based on Russell’s quarterly survey of 40 Australian fund managers.
Russell and State Street differed on consumer spending with Russell bearish on the sector’s prospects, but State Street more sanguine and upbeat on its resiliency.
The high hopes pinned on consumer discretionary spending were deflated by the Reserve Bank’s two hikes in interest rates and flagging of more to come, said Russell’s Bennett. “The proportion of managers factoring in a decline for the sector was up from 9 per cent to 30 per cent,” said Bennett.
“Little doubt appears to be cast over mortgage repayments making a painful dent in already stretched household budgets,” he added.
In contrast, State Street’s Probyn said fiscal and monetary policy provided substantial and timely support while credit market conditions remained relatively healthy. “Private domestic demand proved resilient [and] exports benefited from China’s ongoing strength,” he said.
Overall, sentiment is positive but interest rates are making a dent, Bennett said, and 54 per cent of managers were predicting a return of 10 per cent or more for the calendar year. Single digit growth was predicted by 30 per cent of managers while a prolonged double-dip was anticipated by 14 per cent. Fortunately, only 2 per cent believe the fall would be worse than 10 per over the year.
In local equities, industrials led the pack with 84 per cent of managers bullish on this sector, followed by materials in second place, at 62 per cent. This sector had struggled in relative terms, said Bennett, losing close to half its market capitalisation in the second part of 2008 and underperforming again in last year’s market rally.
For the other sectors, manager expectations were: consumer discretionary in third place (60 per cent), financials 4th (59 per cent), information technology 5th (54 per cent), energy 6th (51 per cent), consumer staples in equal 7th place with healthcare (39 per cent), telecommunications 8th (27 per cent each), and utilities 9th (18 per cent).
In both telecommunications and utilities, managers further downgraded their expectations and pessimism about utilities reached a new low because the sector’s usefulness as a defensive play – which was very effective in latter 2008 – was lost when the recovery story began to dominate investor preferences.
“While this continues,” Bennett said, “utilities will likely remain on the sidelines.”
Interest rates loomed large in managers’ sentiments on A-REITs, Australian bonds, and cash.
For A-REITs, rate rises were bad news. Managers expect the highly-leveraged property trusts sector to experience more pressure from higher borrowing costs. “Many trusts have a fine balancing act in place that enables them to service their debt,” Bennett said, “but it wouldn’t take an awful lot to upset that balance.”
Consequently, 42 per cent of managers were bearish on A-REITs, compared with the previous quarter’s 23 per cent.
Bonds were looking limp also, as the inverse relationship between yields and prices played out. Most managers (71 per cent) saw no upside over the next 12 months.
Cash was the only asset class to benefit from the rate rises, propped up by the prospect of higher yields with no corresponding capital losses, Bennett said. “Managers’ bullish views have quadrupled since June this year, up to 33 per cent.”
Both State Street and Russell were cautiously optimistic about the Australian economy overall. State Street’s Chris Probyn expected a “solid” expansion of 3 per cent “although below the long run trend, suggesting that a moderate output gap will persist into the medium term”Â.
Russell’s Scott Bennett shared this caution, but the “downside will almost certainly be less severe than for the remaining G20 countries. And, at the moment, that relative advantage is enough to sustain fund managers’ optimistic sentiment towards Aussie shares, and international investors’ demand for the A$.”
