Market news – 31 March 2009
Update from Dr Neville Hathaway, legalsuper’s investment expert
The Australian economy has travelled better than virtually all developed countries through the global financial crisis.
There were three key reasons: our floating dollar, the performance of some trading partners (for example China) and the Federal Government’s stimulus package.
The performance of the Australian share market has to a large degree reflected our economic recovery. From its low point in March 2009, the ASX All Ordinaries Index has now recovered close to 50% of its GFC-related losses.
One indicator of the recovery is that super funds like legalsuper have been comfortable to hold their Australian equities allocations steady. Around 32% of legalsuper members’ assets are now invested in Australian equities.
At the same time, legalsuper remains on watch and in conjunction with our asset consultant JANA and investment managers, is on the lookout for new investment opportunities that may present themselves in the post-crisis period.
The price of risk
Another indicator that markets are stabilising and in some cases improving is the price of risk. When risk premiums go up, share prices tend to fall. When risk premiums go down, share prices tend to recover. Investors watch this important dynamic.
At the moment we are seeing declines in the price of risk, which suggests that share asset prices will continue to return to normal.
In terms of the coming financial year, we are less likely to see investment growth of the same magnitude that we saw before the downturn over the last two financial years. Asset prices have grown sharply in the current financial year and recovered the lion’s share of losses over the last two financial years.
Future earnings will continue to be hard to predict, but there may be some welcome improvements ahead. While before the crisis, analysts tended to be overly optimistic about earnings forecasts, they now tend to be overly pessimistic.
Volatility and the global economy
The variation in share price performance in Australia is partly due to it being a small and open economy therefore impacted by movements in the global economy which remain disparate. Performance will therefore be patchy in Australia – some sectors will do better than others, largely depending on which parts of the world they are dealing with.
Now is arguably a good time for active investment management to provide a real return advantage. Legalsuper engages active investment managers to secure above-index value from active stock selection. This will position super funds like legalsuper to find value where it exists in the Australian share market.
Dr Neville Hathaway
With more than 25 years experience in finance and investments, Dr Hathaway brings to legalsuper a unique combination of direct investment management experience and deep financial market insights from academic research.
legalsuper appointed Dr Neville Hathaway as an expert investment adviser to our investment committee in June 2009. Dr Hathaway attends all investment committee meetings.
He has held senior roles with a number of investment managers including Capital Research Group, County Investment Management and Invesco Asset Management. He was also an Associate Professor of Finance at the Melbourne Business School for six years.
This article originated from the latest edition of legalsuper's Quarterly Market Update. To review this publication, click here.