- World faces high level of uncertainty due to financial instability in Europe
- ‘Now is not the time to be a hero’ – investors should tread carefully and focus on the long term
- Dangers in overweighting or underweighting asset allocations
As the world faces a high level of uncertainty due to financial instability in Europe, Mercer’s Quarterly Market Valuation and Review recommends investors keep to long-term asset allocation benchmarks for riskier growth assets.
David Stuart, Head of Mercer’s Dynamic Asset Allocation team in Australia and New Zealand, said despite the recent turmoil and market volatility, it was too early to determine whether the debt crisis in Europe and the USA could plunge the global economy back into recession.
“Unfortunately, 2011 has been a year of disappointment. We started the year with a strong recovery and the expectation this would continue. However as the year draws to a close recovery has weakened and markets are uncertain,” said Mr Stuart.
“The risks are elevated and the pivotal role politics is playing makes predictions difficult,” he said.
“Although investors might be tempted to trade the peaks and troughs, this is a risky approach. In the current environment, we believe investors need to focus on their long-term investment targets.”
“Now is not the time to be a hero – investors need to tread carefully and focus on the bigger picture,” said Mr Stuart.
“Portfolios should be sitting in the middle at the moment – if investors choose to either underweight or overweight their asset allocations they are making a bet on which way the European debt crisis will develop, when we just can’t be certain yet,” he said.
Mercer’s report, which provides a perspective on relative market valuation and a quarterly market analysis for institutional investors, found one slightly brighter spot: “Emerging market equities have a positive, longer-term structural story, and recent underperformance has restored valuation opportunities,” said Mr Stuart.
Both global and Australian small caps retain an ‘unattractive’ rating, consistent with Mercer’s previous Quarterly Market Valuation and Review.
“We have warned for some time that small caps were overvalued and investors needed to be careful, which has proved to be the case,” said Mr Stuart.
Mercer believes current low yields for global government bonds are unsustainable over the medium term.
“Cash is the preferred defensive asset, with investment grade credit and Australian government bonds also having stretched valuations,” said Mr Stuart.
“Our view that the Australian dollar was vulnerable to a correction proved correct in the third quarter of this year, however following its bounce back above parity with the US dollar, we continue to maintain a cautious view,” he said.
Mercer is a global leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerAU @MercerInsights