Global fund managers have sharply reduced their equity weightings over the past month, which means small investors need to beware of a sucker rally on Wall Street (while betting on Australia for the long-term).
According to the monthly Merrill Lynch survey, a net total of 33% of fund managers said they were overweight equities, down from 52% a month ago. The percentage overweight cash is up by half, from 8 to 12%.
This morning the Dow has had a three-figure surge, but the professionals seem to be out of the market – it’s all retail. And why are the big guys out? Because risk is elevated, and on a risk-adjusted basis global equity returns don’t look promising. Small investors tend not to adjust for risk and then panic when something bad happens.
Reserve Bank assistant governor Guy Debelle put his finger on the problem in a speech yesterday: it’s about the banks – they’re not out of the woods yet, and in fact are in danger of getting caught in a feedback loop.
That is, the danger posed by Greece and Spain (and the UK), and chronic US unemployment, is of another fear-based liquidity seizure in the financial system – not sovereign default, which remains a distant possibility.
Debelle didn’t quite put it like that. He said “We are now into the phase where the weakness in the global macroeconomy is feeding back into the financial sector. We are still yet to see the full impact of the weakness in the North Atlantic economies on the loans on the books of financial institutions.”
The head of European equities strategy at Merrill Lynch, Gary Baker, commenting on the fund manager survey, supported Debelle’s position: “What’s happened in Greece has prompted questions about banks’ lending positions and exposure to other peripheral economies. There’s also a fear that banks’ cost of capital will rise.”
That is not the problem in Australia, as we learned yesterday from Westpac’s half yearly results: cost of bank capital is falling, ratios are strong, credit impairment is receding, and bank profitability is very strong.
Australia’s problem lies not with the banking system or with the macroeconomy, but with the political system – it is going from bad to worse. With a few scattered exceptions, the Australian political classes seem totally incapable now of acting in the national interest or, indeed, of rational thought.
This is not just a minor frustration: the inability of the Australian parliament to maintain a decent output of legislative reforms, and of the nation’s political elites to provide proper leadership, as opposed to being cartoon characters, is a serious threat to the national interest.
So far Australia’s political shambles has not intruded into the consciousness of global investors. The Australian sharemarket has massively outperformed the world over the past 12 months when adjusted for currency change (index times exchange rate). The ASX 200 is up 106 per cent from the 2009 low in March on that basis, versus 60% for the MSCI global index.
The out-performance is mostly industrials and banks (up 150% and 140% respectively). Resources are up less than 100%, adjusted for currency.
Unless the state of politics here stops being our dirty little secret, or global fund investors start listening to an audio stream of Question Time in the House of Representatives for some reason, the Australian market should continue to outperform the world, even as interest rates are raised further this year.
The banks are solid, consumer and business confidence is strong, fiscal stimulus is being maintained unnecessarily, there is a housing and infrastructure deficit, and commodity export prices are rising – especially iron ore and coal.
Australian shares are probably the safest investment bet in the world right now.
But the risks in Europe and America remain on the downside. Their banks remain under-capitalised and beset by worsening credit and their macroeconomies are now facing a long haul of fiscal consolidation and slow growth.
This article first appeared on Business Spectator.
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