The recovery of the global sharemarket has entered the “terrible twos” as the calculation of market valuations and identification of economic trends becomes more complicated, Russell Investments’ chief investment strategist, Andrew Pease, said.
As the second quarter of 2011 got underway, overt optimism gave way to outright pessimism, Pease said, which was historically consistent for global markets in their second year of a recovery.
“Our way of thinking is to not get sucked in on that optimism-pessimism type mood swing and not to get whip-sawed by the market in that way, but to take a medium-term view, and our medium-term view is moderate growth, moderately okay equity market valuations, which means moderately okay share markets returns globally,” Pease said.
Russell is confident of continued moderate expansion in the US economy and near-normal equity market valuations, in addition to an over-valued Australian dollar and high-priced commodities.
It was concerned about the magnitude of a potential China slowdown, Europe’s ongoing debt woes and, domestically, how the weakness of the non-mining sectors of the economy will limit the extent of further interest rate tightening by the Reserve Bank of Australia.
The impact of the end of second round of quantitative easing (QE2) in the US on asset classes was another looming concern for Pease. However he said by the end of the month the “fallout of QE2” will be clear.
Pease warned investors not to increase their risk levels until there was further clarity regarding these concerns: “You always hope time solves these things, but at least time provides some clarity.”
In terms of risk management strategies, Pease said: “What I would be doing right now would be staying at my strategic benchmarks, diversifying my sources of return and then look to be opportunistic. For those with the risk appetite, with the Australian dollar been pushing up towards $1.10, some currency exposure could be quite beneficial.”