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Crystal balls of 44 fund managers

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by Peter Switzer

Christmas and all of its shopping and celebrating activities can be a distraction — a great distraction. And my case was proved on 16 December when I missed an email that told me three out of four fund managers are positive about shares this year.

But wait there’s more — a lot more!

One out of two expect a double-digit return from shares. Regular readers will know that I have formed a consensus view from the experts who I regularly talk to, argue with and interview. However, I didn’t have the hard facts. I do now.

Bullish outlook

An Investment Manager Outlook (IMO) survey by Russell Investments came up with this summary view:

“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.”

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.

A survey of this kind securing the views from the crystal balls of 44 leading Australian fund managers is one of the most comprehensive indicators of local investor sentiment available.

Other conclusions from the survey included:

Bonds and A-REITs sentiment has been hit by increasing interest rates.
And opinion is divided on the strength of Australian dollar this year.

The outlook

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

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

Bennett says most managers are showing a strong preference for local shares, with international shares strong as well.

Meanwhile he says, “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.”

Some 84 per cent of managers expect industrial stocks to increase in value over the year and this is 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 per cent of managers now bearish on the sector compared to nine per cent 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,” Bennett says.

Bulls and bears

Of course, higher interest rates make cash and term deposits look more attractive. One quarter ago only eight per cent of fund managers were bullish on cash but that has quadrupled to 32 per cent.

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

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 old rule is if interest rates go up, then bond prices go down and no one wants to hold assets where the price is falling.)

The view towards Australian Real Estate Investment Trusts (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 de-leverage their balance sheets through 2009, they still remain relatively highly geared and sensitive to increases in interest rates,” Bennett says.

(A-REITs allow investors to purchase an interest in a diversified and professionally managed portfolio of real estate in the same way as you would purchase shares in a company or a unit in a managed fund. The real estate portfolio can include commercial, industrial, retail or a mix of real estate assets.)

The Aussie dollar

On the Aussie dollar, the fund managers were split with 38 per cent predicting no further increases in the dollar and the same percentage predicting further growth.

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

As someone who has taught Macroeconomics at the University of New South Wales before the media and financial planning worlds took off, I always thought the Oz dollar is a difficult beast to consistently get right. When I am asked for a prediction I regularly reply: “I think it will go up or it will go down or it will stay where it is!”

For the sake of the economy, a lower dollar would be good for exporters and suffering industries such as tourism, which is a good job creator.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Thursday, January 28, 2010