Despite the likelihood of another small rise in the Australian cash rate tomorrow, interest rates are no longer the main story for investment markets.

The big question now is: ‘how deep will the US go towards recession?’, according to Russell Investment Group’s new Australian investment strategist. Andrew Pease, who joined the Russell international investment strategy team in Australia recently from JP Morgan, told the Russell conference last week that, largely because of the US housing downturn, “there could be talk of recession”. While Russell thought that a US recession was unlikely, Pease said that the Federal Reserve would need to cut interest rates next year to offset the impact of the housing market downturn. Russell’s investment strategy team, unlike those of large fund managers, is designed more to provide clients with a framework to understand market trends than trying to pick the trends for its own funds. If investing is like war – extreme boredom punctuated by moments of sheer panic – then the strategy team is like a “steadying hand for those moments of panic”. Pease said the US corporate sector had never been in better shape and while there would be a slowdown, the US had never gone into recession without the corporate sector first getting into stress. The Australian sharemarket had moved into the second phase of its upswing, which would not provide the high returns of recent years but would still present some opportunities. This phase involved a P:E ratio re-weighting, compared with the first phase, which was about earnings. “Phase two is the harder part to get right,” Pease said.

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