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Australia
Melbourne, 4 November 2009

Investors should remain overweight in global equities despite the rallying share market, Mercer advises in its latest market valuation report.

The recommendation appears in Mercer’s October 2009 Dynamic Asset Allocation Report, a quarterly market analysis prepared for its Australian clients, including superannuation and insurance funds.

David Stuart, Head of Mercer’s Dynamic Asset Allocation team in Australia and New Zealand, said Mercer has maintained the view that overseas shares have been undervalued for the past year, and we continue to recommend them for medium-term investors.

“While the markets have rallied in recent months, the window is still open for global equity investment at good prices. A stronger outlook for corporate profits has been built into valuations to some degree, but we still see the potential for impressive earnings growth, underpinned by significant improvement in operating margins.

“Despite valuations moving closer to what we regard as fair value, we still believe global equities should offer above-average returns over the medium-term and we are recommending institutional investors remain overweight in this asset class.” he said.

The report once again rates Australian shares as fair value, but elevated Australian unlisted property from an ‘overvalued’ to a ‘neutral’ rating. Mercer argues that as valuations approach realistic market levels, the sector may be close to reaching a bottom.

“The unlisted property sector has continued its back-to-basics process of improvement, with a focus on de-leveraging, renegotiating covenants, proactively managing tenants and delaying capital expenditure. Combined with the recovery of capital markets and increase in transactions, this sector has become a more attractive investment target,” Mr Stuart said.

Mercer’s report comes at a time of increased interest in medium-term investing, according to Mr Stuart.

“In the wake of the GFC and its resulting market turmoil, there’s been a move away from the ‘set and forget’ strategic asset allocation model traditionally favoured by institutions and their advisers.

“Allocations based on long-term return assumptions take no account of current market conditions and prospects, so we’ve seen a significant increase in the use of the Dynamic Asset Allocation approach to control risk and search for improved returns. It’s another way to achieve the ‘alpha’, (or above index) returns that investors usually only expect from active fund managers,” he said.

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