Mercer opts for equities and growth assets

David Stuart, Head of Mercer's Dynamic Asset Allocation team in Australia and New Zealand, said despite the shake-up caused by world events, global equity markets had proved resilient.

"With the exception of Japan, which has fallen nearly 10% since our last report in January, major equity markets have delivered positive returns, led by the S&P rising 3.6%. Given the backdrop of the Japanese earthquake, political turmoil in the Middle East and North Africa, resurgence of European debt worries and rising inflation pressures in major developing economies, this is a resilient performance and a promising sign for investors," Stuart said.

"Based on our analysis, and in line with our recommendations last quarter, we are advocating an overweight position in global shares relative to overvalued bonds," he said.

Looking at domestic markets, Stuart said the big story for Australian investors is the strength of the Australian dollar compared to a weak US dollar, but warned this rally had left the Australian currency looking exposed. Mercer's medium term view therefore remains biased towards overseas currency exposed assets which should remain overweight.

"With the Australian dollar at a post-float high against the US dollar close to US$1.10, we are currently experiencing a sweet spot of strong commodity prices and rising interest rate differentials. However, this strength will be hard to sustain once US interest rates begin to rise, and there are downside risks to commodity prices in the medium term" Mr Stuart said.

"This isn't expected to happen until 2012, but if the US dollar turns, it could also impact commodity prices and put significant downward pressure on the Australian currency over the next one to three years. Therefore we have placed a very conservative valuation on currency, shifting from unattractive to very unattractive.

Mercer has a retained a neutral rating for Australian equities, given the broader outlook for earnings growth in Australia remains positive.

Stuart said while the tragic events in Japan pose a mix of adverse impacts on growth and higher prices, they are likely to prove much smaller and briefer than the effects of surging commodity prices.

"Putting aside the short-term impact of the Queensland floods, evidence is mounting that the resources investment boom is set to dominate Australian economic growth for the next few years," Stuart said.

The April quarter also saw Mercer change its fair value signal for Global Real Estate Investment Trusts (GREITs) from neutral to unattractive based on US REITs (which make up 40% of the global index) moving above fair value.

Comments from our readers

On 2 June 2011 at 9:28 am Independent Observer said:

It is this style of rhetoric that misleads investors, and frankly adds very little value to portfolios.

On the one hand the industry educates investors to invest for the longer term in order to achieve the desires that they are seeking. On the other, we promote quarterly overweight/underweight shifts to capture moments in time.

Is a “neutral rating for Australian equities” still relevant into today’s globalised environment, or will some companies continue to succeed / fail irrespective of the economic environments where their head offices are based?

Whilst these sorts of stories are entertaining, they once again demonstrate the time-warp that the financial services industry remains stuck in.

On 2 June 2011 at 10:56 am traveller said:

So what's your view of the market then Mr Independent Observer?

On 2 June 2011 at 11:53 am Independent Observer said:

Whilst it would require a far more detailed explanation than is permitted - there is renewed interest in what are going to be the major forces influencing markets over the next decade as opposed to responding to tactical geopolitical / macro observations. This requires less emphasis on traditional portfolio construction, and greater interest in alpha targeting with appropriate tilts.

A useful starting point in understanding this approach is to fully understand the appeal/failings of MPT – which unfortunately doesn’t get much coverage in the industry

On 2 June 2011 at 7:44 pm anon said:

To IO, you could always offer to write something for Goodreturns?

On 2 June 2011 at 8:12 pm The Boss said:

Maybe people should attend this event :-)
http://www.goodreturns.co.nz/diary/perfecting-investment-portfolios-283.html

On 3 June 2011 at 2:21 am Collin said:

Mercer's asset allocation views seem contrary to how they ACTUALLY manage money for investors such as KiwiSaver members. My understandng is that Mercer adhere religiously to strategic portfolio allocations i.e. they don't practice dynamic asset allocation. If that's the case why are there views of any consequence.

Mercer opts for equities and growth assets

Despite the tumultuous events over the last quarter, the rally in global equity markets has continued and investors should maintain an overweight position in overseas shares this quarter, Mercer says.

Thursday, June 2nd 2011, 7:39AM 6 Comments

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