Australia
Melbourne, 12 August 2010

The market has effectively priced in both the prospect of recovery and the risks of it being derailed, with valuations for most asset classes rated ‘fair’ in Mercer‘s latest Dynamic Asset Allocation Report.

The Dynamic Asset Allocation report provides guidance for medium-term (two-year) asset allocation, and summarises Mercer’s view on the market outlook and valuations for that period. David Stuart, Head of Mercer’s Dynamic Asset Allocation team in Australia and New Zealand, says the story behind medium-term asset valuation is quite positive, but not without challenges.

“The recent choppiness in markets could continue for some time, but we’re not expecting a repeat of 2008. While there is talk of a double dip recession, as we are hearing from some bearish commentators, Mercer believes market valuations have priced in big picture risks.

“This has not changed substantially since our report in early 2010. We felt at that time that the road to recovery would be rocky, and that has proved to be case, particularly for equities, however it continues to trend upwards.

“There are still the macro risks, such as developed countries’ government debts, but companies have been reporting positive earnings, and this is reflected in equity prices. Overall, we believe things will be volatile for some time, but still heading in the direction of recovery – even if it is at a grinding pace,” said Mr Stuart.

One of the few stand-out asset classes in the Dynamic Asset Allocation report is Emerging Market Equities, rated as ‘Attractive’.

“We moved up our rating for emerging market equities because we like the structural story behind them. There’s going to be strong growth in the longer term because these countries don’t share the same problems as developed economies, such as more mature consumer markets and heavy government debt. We had previously been concerned about inflows coming in too fast and pushing valuations too high, but that has eased off since the beginning of the year, as investors generally have reduced exposures to risky assets,” Mr Stuart said.

The report reveals that Mercer is optimistic about local economic conditions.

“The risk of a sharp slump in Australian GDP growth in late 2010 and early 2011 are low. Rather, the rapid withdrawal of stimulus money and the emergence of a more subdued short-term global growth outlook have only curtailed the potential for above-trend growth,” Mr Stuart said.

Mercer has been providing the Dynamic Asset Allocation offering in its current form for the last four years, and Mercer’s analysis suggests that it has enabled clients to reduce risks and enhance performance over a medium term timeframe.

“In particular, the call to underweight the Australian dollar ahead of the collapse in 2008, and the recommendation to buy equities in early 2009, have illustrated the benefits of adopting a disciplined medium term approach to asset allocation,” Mr Stuart said.

 Download Mercer's latest Dynamic Asset Allocation Report