Investment managers believe the trigger most likely to pull Australia out of its two-speed rut and stimulate recovery in the non-mining economy will be a lowering of interest rates by the RBA, according to the latest Russell Investments’ Investment Manager Outlook (IMO) survey released today.
The quarterly IMO surveys around 40 leading investment managers to collect their top-line opinions on the direction of markets, sectors to watch and wider trends that could impact Australian investors.
Forty-three percent of managers believed an interest rate cut was more likely to stimulate domestic non-mining growth, followed by a recovery in global developed markets, depreciation of the Australian dollar or some other, unspecified event.
Russell’s Managing Director of Consulting and Advisory Services, Greg Liddell, said the results from the survey indicated managers believe what is required is a turnaround in sentiment and the most effective means to bring that around is for rates to drop.
“We’ve seen the market price in a series of rate cuts for the coming 12 months and as a result managers are now viewing this as a pre-condition to kick starting the non-mining economy, improving confidence and perhaps, but not necessarily, triggering a drop in the AUD,” Mr Liddell said.
Managers enter risk-off as defensives gain favor
In contrast to results from the March survey when managers were preparing for a “risk-on” environment, managers in the September survey overwhelmingly indicated the onset of a “risk-off” environment.
This mood of caution saw managers favoring defensive assets including Aussie bonds and A-REITs, with sentiment towards Australian bonds improving this quarter and bullish managers increasing from 19% to 29%.
Unsurprisingly, managers still cling to a strong home bias with Australian shares maintaining their mantel as most preferred asset class. Managers indicated significant value opportunities existed in the present environment with a record 77% believing the market to be undervalued – the highest number to believe the market is undervalued in the six year history of the IMO. Despite this, the number of managers bearish on Australian shares rose this quarter, suggesting that at least some managers believe markets will be somewhat driven by sentiment rather than fundamentals over the near term.
Managers’ value plays this quarter were on industrials and defensive telcos with 59% bullish on the industrial sector up from 46% last survey. Mr Liddell said this was largely attributable to good cash flows and sound balance sheets of industrial players.
“While pressure this quarter has come in the form of higher interest rates relative to the rest of the world, and a strong (albeit slightly lower) AUD amid slower growth prospects, industrials are looking to be in good health from a balance sheet perspective. Managers are viewing this relative to other sectors and as such seeing value opportunities,” Mr Liddell said.
What are managers’ global counterparts seeing?
With global events playing on the minds’ of investors, this quarter the Australian IMO included findings from the recently issued US IMO, to see what the grass looks like on the other side.
The topical question put to US managers this quarter was whether they believed the United States is heading into a double dip recession. In response, an overwhelming 79% said they do not believe the US is heading into a double-dip recession with corporate America’s strong balance sheets backing their belief. However despite this optimism, 62% of managers who reject the double-dip hypothesis, believe growth will remain slow for the next several years.
Interestingly on the topic of volatility, professional US money managers said they don’t see the current market swings as a sign of impending collapse, but many instead are viewing it as a buying opportunity. Their explanation for investors’ risk aversion is that it’s based on emotional responses rather than rational judgment of underlying company fundamentals.