Over the quarter ending 30 September 2014, the MSCI World Index (ex-Aust) in local currency rose by 0.46%.

MSCI International (ex-Aust) Index (local currency)


Over the quarter US equities reached new highs, buoyed by continued earnings growth. Although US growth is on a solid footing, recent sharemarket gains have eroded the value proposition somewhat. The cheap money that has helped keep company borrowing costs low and encouraged investors to abandon the relative safety of cash and buy shares, will soon fade with the imminent ending of Quantitative Easing (QE). Nevertheless, while the US is preparing to end QE, Europe is likely to extend monetary stimulus, which may provide some support to its sharemarkets despite the relatively poor fundamentals in that region. Further, while we expect China's economy to slow in 2015, shares in that country are already factoring in lower corporate profit outcomes.


Earnings in the United States grew by 11% in the June quarter. Consensus earnings growth expectations now approximate 9.6% for CY14 and 14% for CY15. Our fair value estimate for the S&P 500 for CY14 is 1790 and 2043 for CY15. Given that the S&P500 index is already trading around 1972 points, short term value is not evident.


The outlook for global markets is mixed. Upside to corporate profitability remains possible in many developed economies given that output remains well below potential. Yet pervasive structural imbalances and geopolitical risks continue to impede growth outcomes. Given that valuations are not overly attractive, the risk/reward equation is not compelling. Accordingly we recommend maintaining a modest underweight position.

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