In an October market update, UniSuper's Chief Investment Officer, John Pearce, said equity prices could rally, or at least hold gains, if the global economic position doesn't worsen in coming months.
"If the global economy does not get any worse, and financial conditions remain accommodative, there is no reason why [equity] markets cannot at least hold the recent gains. Any surprises to the upside could fuel a further rally in asset prices," he said.
He said share markets had rallied over the past year because financial markets were factoring in even worse economic data and financial conditions than those which eventuated.
"Furthermore, markets are still factoring in very subdued growth and valuations remain below historical averages," he said. Any reassessment of those valuations could trigger stronger asset prices, he said.
A similar theme comes from Principal Global Investors, where the fund manager in a third-quarter update on global equities has warned investors against exposing themselves too heavily to fixed-income assets, arguing the case for shares.
"While many investors continue to shun equities because of volatility concerns, there are virtually no 'safe' assets that afford meaningfully positive real yields in the current environment. Indeed, the mere notion of 'safe' assets has been fundamentally altered.
"In other words, savers in low-volatility fixed-income products will continue to transfer wealth to borrowers, which should generally support the case for risk assets," Principal said.
Principal said the trend could be for better news ahead following the earnings season in the US.
"There were some elements of positive surprise, and even a few bright spots. Said another way, some of the economic news was less negative than anticipated.
"A slight majority of US companies reported second-quarter earnings that came in
ahead of the lower consensus expectations. Purchasing manager indices (PMIs) and other key leading indicators continued to signal slowing growth, but directionally bottomed and showed tentative signs of trending higher for Europe, and back into positive territory for the US."
Like Principal, UniSuper's Pearce warns against allocating too heavily to bonds.
"As we have consistently said, if excess volatility poses a problem, the only truly defensive asset is cash," he said.
"You may be thinking that the chances of bond yields rising from 3 per cent to 6 per cent are quite low, and if current economic conditions persist you will probably be right. However, history shows that bond yields can rise significantly.
"Bubbles and busts are not the sole domain of equity markets - the bond markets can be just as volatile."
