Panel shares likely growth scenario

INTERNATIONAL shares are already back in vogue within the Australian managed funds community.

Holding its quarterly meeting last week, the Morningstar Expert Asset Allocation Panel – which includes leaders from Armstrong Jones (NZ) Ltd, Rothschild Australia, Merrill Lynch, JB Were, AMP Henderson and BT Funds Management (NZ) Ltd – concluded that international share markets offered the best growth opportunities for Australian investors for the coming year.

Panel chairman Donal Curtin said the consensus was that the successive monetary and fiscal stimuli from the US Federal Reserve after September 11, on top of a recovery already in the pipeline, amounted to “the mother of all stimulations”.

“This should lead to significant growth in the US economy over the coming year, and also trigger a worldwide recovery,” Mr Curtin said.

“In the US, with interest rates at 40-year lows, plus the strong boost to consumer spending from lower oil prices and mortgage refinancing, as well as the initial kick-start of a rebuilding of inventories, there is every chance that economic recovery could beat the current consensus forecasts.

“The panel’s overall view is that international shares, led by the US, continue to offer the best growth prospects for investors looking to grow their capital over the medium term.”

Other key conclusions from the panel include the following.

  • Australian shares are expected to have a solid rather than a spectacular year. Ongoing economic growth at a 2.5-3.0 per cent pace, corporate profit growth across a wide range of sectors (including mining), and superfund inflows are all positives, but the local equity market could be outpaced by ‘higher beta’ offshore markets with greater leverage to US recovery.

  • Australian listed property, which had a very successful year in 2001, is likely to offer more modest returns (in the region of their dividend yield) this year.

  • International fixed interest markets do not look attractive at current levels from a valuation perspective, due to the prospect of strong growth in the US and world economies.

But the fragility of the international markets was demonstrated again last week when the Dow Jones lost 2.5 per cent in a single night, despite strong durable good orders and consumer sentiment data being released earlier.

Explaining the equity sell-off, a brief by Bank West’s economic department said the market was spooked by concerns the allegedly spurious accounting practices associated with the collapse of Enron many not be an isolated case.

“If other companies have inflated reported earnings in the past, the optimistic profit assumptions that drove the Dow and other equity indices back above pre-September 11 levels by the middle of November may prove to be illusory,” the brief says.

Volatility aside, financial consultants Godfrey Pembroke warn that investors should not expect to be spoiled as they were during most of the 1990s. Although an equity recovery is likely, it will be more modest than what investors have been accustomed to.

“Intense competition in many industries worldwide has benefited the consumer enormously, by keeping prices low,” a Godfrey Pembroke newsletter explains.

“This, in turn, has kept inflation in check. Price competition has resulted in tight profit margins for companies, translating into investment returns that are more in line with historical standards.”

Australian companies will be expected to put their hands in the their pockets and increase business investment during 2002, alleviating any housing downturn – although a caveat on this assumption will be what occurs in the United States.

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