Equity market sentiment rebounds but investors cling to safe haven assets

  • Majority of Australian investors bullish on local equity market
  • Investors could miss out on opportunities in volatile markets by being too risk adverse

Investor sentiment in Australia is on the rise and there is a markedly more bullish attitude to Australian equities, according to the quarterly ING Investor Dashboard Sentiment Index released today. However, it seems investors are not acting on this more positive view, still favouring cash and gold deposits over shares.

The survey measures investor sentiment across 12 countries in the Asia Pacific region, focusing on changes in market sentiment, investment attitudes, investment performance and the financial situation of 3,755 investors. These factors are quantified and averaged resulting in a sentiment score. The Australian portion of the survey was conducted amongst 313 investors with liquid assets of US$100,000 or above.

Sentiment in Australia improved after plunging to a low in last quarter’s survey, scoring 135 out of 200 this quarter, well above the 113 of last quarter. However Australia is still lagging against its neighbours and was the third most negative country in the pan-Asian region behind Japan and Korea. Sentiment is also far behind some countries such as India, which was the most positive in the region with a score of 175, and financial centres like Hong Kong which scored 151.

Investors were also more bullish towards Australian equities with 84% thinking the market will either rise or remain stable. Last quarter 39% thought it would rise and 26% said it would stay the same. Investors also believe the stock market will increase by 6.42% over the next three months.

“It is encouraging that sentiment is picking up in Australia, albeit on a lag with Asia, particularly in the equity market where we are seeing an increasingly positive attitude,” said Jim McKay, head of sales for INGIM.

Cashing in

Yet despite this bullish view of equities, when it comes to deciding where to invest, cash and gold are still the favoured option. Gold scored 50 points when rated as an investment while cash deposits scored 31 and local stocks only 23.

Cash was also perceived as the best investment to take advantage of domestic interest rates and was chosen by 55% of respondents, compared to 27% selecting stocks. Similarly, cash and gold were considered the best investments to protect against the European debt crisis with 33% and 44% nominating them respectively.

When asked where they would invest on the risk/reward spectrum, there was a definite weighting towards the safer end. Low risk/return investments such as medium growth managed funds and cash were favourable for 64% of respondents and unfavourable for only 7%, compared to only 23% seeing merit in high/risk return investments like derivatives and 38% finding them unfavourable.

“It is interesting that there seems to be a disconnect between what investors are thinking and what they are doing,” said Mr McKay. “The fact that they expect the equity market to improve, yet prefer cash and gold, perhaps shows that continued volatility in the markets is still making them nervous.”

Australia robust while US economy casts shadow

Most Australians (79%) continue to predict that domestic inflation is on the rise, similar to 78% last quarter, reflecting the ongoing strength in the Australian economy.

Australians also found ways to take advantage of their strengthening currency, with many investors saying foreign currency is a good investment.

“As we all know the Australian dollar has continued strengthening, reaching almost unprecedented highs, and it is interesting to see Australians considering taking advantage of the rising Australian dollar by investing in foreign assets,” Mr McKay said.

When it comes to currency, Australians were also sceptical on the US dollar, with only 10% expecting it to appreciate and 49% expecting it to depreciate further.

In fact Australia had one of the most negative views on the US economic situation of the countries surveyed across pan-Asia, with only 27% thinking it will improve this quarter, compared to 31% last quarter. More than half, 62%, thought it would take three months or longer to recover. Thirty one percent thought US interest rates will rise and 55% thought they would stay the same next year
“With all these pressures it is not surprising investors are still attracted to safer assets, despite predicting increasing stock market strength. Yet this overly cautious attitude could cause them to miss out on opportunities. INGIM sees volatile markets creating good opportunities for quality active managers,” said Mr McKay.

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