Conditions are ripe for negative returns

A DROP in the world equity market and the rise in the Australian dollar has many investors nervously watching as their superannuation takes a step backwards.

For the first time since 1987, most superannuation and financial investment funds will be posting a negative return for the financial year 2001-02.

With many funds tying a quarter or more of their capital to the international market, investors might be asking whether the international exposure is worth it.

The United States, because of its sheer weight of funds, has been leading the international down-grade in equity values.

The first hints that US consumer spending is beginning to wane are filtering through the US market and affecting US stocks.

The Standard & Poor 500 Index dropped during 11 of the past 13 weeks, while the US stock bench-mark last week came within a whisker of the three-and-a-half-year low reached in the aftermath of the events of September 11 last year.

US Treasury Secretary Paul O’Neill, in a media briefing following a meeting with finance ministers from the Group of Seven industrial nations, was upbeat.

He said the US economy would eventually go up, “maybe sooner rather than later”.

But Mr O’Neill acknowledged that fear of further terrorist attacks in the US was possibly under-mining investor and consumer confidence, and was behind the drop in equities.

“It’s not just a cloud for the market, it is the cloud over how people feel,” Mr O’Neill said.

“Something like 80 per cent of the American people are concerned about another terrorist event, and that has a weight and it affects how people feel.”

Australian employees with their future superannuation linked to the performance of the US market will need to cheer US consumers on so that, if nothing else, their US investments may hold steady.

Consumers, who account for around two-thirds of the economy, have been instrumental in keeping the US in check as business investment slumped in the recession that began in March 2001.

US data show that consumers are running out of steam.

The US Government reported last week that retail sales fell three times more than expected in May, while consumer sentiment declined to the lowest level since February this year.

But is the 12.5 per cent decline in North American equities over the past year – reported by InTech two weeks ago – likely to continue, and should investors move money back into the domestic market?

International fund manager Lazard Asset Management Pacific Co senior vice-president Susan Roberts, who was in Perth last week addressing clients of SMF Funds Management, believes that while international shares may currently appear less glamorous, pulling out and giving into the fears will prove an expensive exercise.

And it would also mean the investors are denying themselves the opportunity to outperform the local market, she said.

Ms Roberts said that if investors believed the international market was likely to recover, as history shows it should, it makes prudent sense to continue investing with an international exposure.