Although global equities have significantly underperformed Australian shares in the past 10 years, financial planners should not assume such weakness would continue over the next decade as fundamentals have changed, according to Schroders.
“If we look at the level of the S&P/ASX 200 at mid-2000 and where we were in mid-2010, the market increased by roughly 1200 basis points,” the fund manager’s investment specialist Luc Simoncini said.
“Out of this 1200 basis points, more than 950 basis points came only from the resources sector. It was a highly concentrated bet on resources and financials.
“So I guess the question is if you feel we can see a repeat of that outperformance for the next 10 years, then you are going to have to be very bullish on commodities and very bullish on the financial sector.”
Simoncini also said valuations today are far different to where they were during 2000.
He said global equities were “extremely expensive” at the start of the century, when they traded at price/earnings multiples of around 40, compared to roughly 25 for Australian equities.
They have since corrected to around 14 times as at mid-2010, in line with Australian equities.
“The points at which you start investing makes a huge difference in terms of your return over the long term. At the beginning of 2000 it was a no-brainer avoiding global equities,” Simoncini said.
He said the Australian dollar’s appreciation over the past 10 years was unlikely to continue because the currency is overvalued and the interest rate difference between Australia and other advanced countries would reduce amid the global economic recovery.
“So we’re at totally different starting points in 2010 when it comes to valuation compared to where we were in 2000 and we can probably say the same when it comes to currency and the impact of currency,” Simoncini said.
