Asset class outlook

Felix Stephen, Senior Investment Strategist – St.George Investment Solutions

Australian shares

Growth assets are expected to deliver superior returns in the short term as investor risk aversion has made these assets relatively cheap. The overall outlook remains positive in the medium- to long- term. The dividend yield on offer in Australia, coupled with resources exposure makes Australian equities attractive for medium- to long-term investment. Financial sector yields are particularly attractive. We believe an overall upward trend is likely for domestic equities over the next year or two. However in the interim, the market is likely to undergo shallow and uneven corrections, with the US Presidential election in particular causing a potential blip.

International shares

Global equities appear attractive on a total return basis, since the asset class was sold sharply by risk-averse investors. Market volatility could moderate in the near-term but will most likely remain elevated relative to past years.
We are positive on U.S. and Japanese equities, but believe European equities may undergo some uncertainty and weakness due to ongoing financial market turmoil within some European Union members' economies. In the short term, we suspect that emerging market equities may under perform developed market equities as the lagged effect from the global growth slowdown impacts upon emerging economies.
We believe that the broader upward momentum witnessed in global equities will be maintained until around October this year when uncertainty around the US Presidential election could cause a temporary reversal to this trend.
In the medium- to long- term, emerging equities should retain the ability to deliver superior returns relative to their developed market peers.

Listed property trusts

We believe that the global listed property market offers relatively good value. Risk-averse investors have sold the market heavily on concerns regarding continued dysfunctional credit markets.
While these are legitimate concerns, the market has priced-in an extremely negative scenario, making the sector an attractive investment on a tactical basis.

International bonds

Extremely low money-market rates in most developed countries and a higher interest-rate structure in Australia has made the interest rate 'carry' favoured International Bonds (hedged) in the short to medium term. We believe that global credit markets are becoming increasingly more attractive to investors because of the recent sharp widening of credit spreads relative to sovereign debt. We expect US ten-year yields to move towards 4% as the Fed signals its intention to normalise official interest rates.

Australian bonds

We are negative on Australian bonds, and anticipate the US-Aus ten-year spread to narrow towards 200 to 225 basis points from its present 250+ basis point spread.
We are more favourable towards the selective buying of credit given that credit spreads have widened significantly over the past six months. We anticipate the Australian ten-year bond finding good buying support around the 6.25% to 6.50% yield levels.

Currencies

We are positive about the US$ on a medium-term outlook, given that the US equity market will become more attractive following the proactive stance taken by authorities in helping to support investor confidence. The A$ is likely to soften against a strong US$, but should be stronger against the Euro, British Pound and the Yen. The A$ is likely to remain soft against Asian emerging market currencies.