The Australian share market is one of the most undervalued stock markets in the world, but it still lacks a catalyst for an upturn, according to global asset manager Russell Investments.
"The interesting one is Australia," Russell Investments Australasia chief investment strategist Andrew Pease said at the Russell Australian Investment Summit last week.
"It had European-like share market performance in the best-performing developed economy in the world. So that's why it is more undervalued than Europe is."
Pease estimated the Australian share market was 25 per cent undervalued, while the United States stock market was only 7 per cent undervalued.
The eurozone markets are 19 per cent undervalued, while emerging markets are 16 per cent undervalued.
"No matter what valuation we use, there is not a lot of undervaluation in the US share market. We are sort of in the right zone right now," Pease said.
"If you look at the Chinese share market, it is trading at 1.5 times book value and eight times forward earnings; that looks pretty good."
Despite the low valuation of the local share market, there was still no indication prices were going to rise in the near future, he said.
"It looks cheap, but where is the catalyst for a turnaround?" he said.
"My guess is that we will see a better performance from the Australian share market relative to the rest of the world after the currency has gone down to 90 or maybe 85 cents and after the Reserve Bank has cut interest rates, and after the worst effects of the fiscal tightening have come through.
"I think there is a positive story for Australian shares out there, but I think the catalyst is still a while away yet."
Overall, he said equities were likely to perform better than bonds over the next decade.
"Over a five or 10-year period, it is pretty likely that we are going to see share markets outperform bond markets," he said.
"The thing that we have been debating a lot in our strategic tilting process: when are we going to hit the [US] Treasury bear market?
"We've been talking about whether to take positions against US bonds since US Treasuries went below 2.5 per cent 12 months ago."
Bonds were currently so expensive it was almost beyond comprehension, he said.
"To think of a measure [that shows] just how expensive government bonds are, you just have to look at what the yields are on the US Treasury inflation-protected securities (TIPS)," he said.
"A 10-year TIPS yield in the US is yielding minus 0.5 per cent; a five-year TIPS yield is giving a yield of minus 1 per cent.
"Think about that for a moment what it really means: it means the investors are prepared to buy a five-year government security that will pay them the inflation rate less 1 per cent. It is absolutely extraordinary.
"It is a measure of just how much deep pessimism is priced into global bond markets right now."
But a flight out of bonds was dependent on a catalyst, he said.
"We still don't see a secular sell-off in bond markets until we can see a scenario that the US economy is heading on a path for sustained trend, or above trend, growth, and that doesn't look like it is going to happen anytime soon.
"But this is one of the really big issues to watch."
