Growth assets should deliver returns in 2011, Russell global outlook says

Global assets neither expensive nor cheap

Equities favoured but international preferred over domestic

Riskier asset classes such as equities and property are expected to present the best value this year according to the Russell Investments 2011 annual global outlook released today.

“Eighteen months into economic recovery, we are at an interesting point in the cycle where the challenge is that markets are not expensive but not cheap either,” said Andrew Pease, chief investment strategist Asia Pacific for Russell Investments. “Therefore we recommend investors maintain a moderate bias to riskier or growth-oriented assets, in particular shares, which should continue to gain in value over the year ahead,” he said.

International equities in favour

While Russell is moderately bullish on the equity market, it recommends local investors favour international shares over Australian shares due to their greater earnings upside potential.

“The Australian equity market is expected to face ongoing headwinds after underperforming in 2010 compared to global valuations, which look more attractive,” Mr Pease said.

Russell’s preferred international equity market is the US, which it rates over European markets that will continue to be challenged by sovereign debt issues. Japan also appears attractive. However, it is still too early to tell if it is cheap or just a value trap, according to the outlook.

“We need to see some reversal in the Yen, which is still at a 15-year high, and signs off Japanese investors and pension funds buying before we can be confident in Japan,” said Mr Pease. “But it is definitely worth keeping an eye on.”

Emerging markets run not over yet

Despite the near-term risks such as a slowdown in China and rising inflation that might trigger tighter monetary policy in many emerging market economies, Russell believes emerging markets have solid medium-term prospects.

“While uncomfortable with the hype, we think valuations for emerging market shares are still acceptable and the sector is in the process of being re-rated,” said Mr Pease.

Commodity risk bad for AUD

The outlook for Australia is also negativity affected by commodity prices, which Russell believes are overvalued.

“The commodities hype has lead to speculative excess and too much financial demand, pushing up values,” said Mr Pease. “Commodities have down side risk.”

This cautious stance on commodities translates to a negative outlook for the Australian dollar, also affected by recent high valuations.

Russell sees few supportive fundamentals for any of the major currencies but thinks the US dollar is the ‘least ugly’after experiencing significant falls and the US economy showing evidence of a sustainable recovery. The Euro, meanwhile, could fall further.

Russell does not favour global government bonds as it believes the rise in long-term interest rates has further to play.

According to the global report, volatility will be a continuing theme as various issues including European debt crises and geopolitical pressures such as in South Korea look likely to disrupt markets, creating a challenge for investors  to separate these disruptions from the real outlook for growth and profits.

“Investors will see this apparent volatility but will have to take a long term perspective to see the other story, which is strong global profits and solid corporate balance sheets. A moderate amount of risk should deliver investors the  best returns,” Mr Pease concluded.