The MSCI World Index (ex-Aust) in local currency terms returned
4.23% over the quarter ending 31 March 2015.
MSCI World (ex-Aust) Index (local
Low global interest rates have forced investors to abandon low
yielding cash investments as a source of income and seek riskier
assets that generate higher rates of return, principally shares.
This phenomenon has been wide spread and has been a key driver of
global sharemarkets over the last few years.
Unfortunately, chasing higher yield can sometimes come at the
expense of ignoring the underlying fundamentals. The United States
is a good example, where despite the strength of the economy,
valuation metrics are stretched. Investor over-exuberance has
caused implied valuations (as reflected in current share prices) to
run well ahead of forecast corporate earnings. Periods of over
valuation are not uncommon but increase the downside risk if
earnings disappoint or the outlook deteriorates.
In Europe, the upswing in business activity over recent months
is gathering momentum, which augurs well for corporate profits,
particularly as they are coming off a relatively low base. Although
European markets are already factoring in part of this growth, we
believe further upside remains should the recovery continue.
In Japan, despite recurrent economic weakness, monetary easing
plus the Government Pension Investment Fund's increased
allocation to equities should continue to support share prices.
Valuations in Emerging Markets are mixed. Markets exposed to the
downturn in China appear reasonable value but this assumes China
manages to avoid a hard landing and commodity prices soon
On balance we believe global sharemarkets are overvalued,
particularly in the United States. Nevertheless we are not
necessarily expecting any sharp correction as financial and
economic conditions remain broadly supportive. In the absence of
value though, it remains appropriate to gradually decrease exposure
to this asset class into the current strength.
In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
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