Fears local optimism will be short-lived

THIS week’s optimism in the local market may prove short-lived.

AMID growing concern about risks from Ebola, Middle East tensions and signs that a modest recovery in the global economy is slowing even before the US Federal Reserve has completed its latest stimulus program, this week’s optimism in the local market may prove short-lived.

But some fund managers were expressing a desire to buy beaten-up Australian shares after the index fell almost 10 per cent in the past two months. The dollar fell 7 per cent in the same timeframe, boosting the outlook for companies with foreign earnings, while making Australian shares cheaper for offshore investors.

Regional sharemarkets rose yesterday with most benchmarks managing moderate gains as investors reacted positively to sharply lower oil prices and bond yields.

Australia’s S&P/ASX 200 extended its recovery from an eight-month low after US 10-year bond yields dived to a 15-month low. Major Asian markets rose at least 0.5 per cent after Brent crude oil tumbled 4.5 per cent to a four-year low of $US85.04.

“We have had enough of a fall for now,” said White Funds Management managing director Angus Gluskie. “I think there is potential for the market to continue to move up in the short term, but if the risks continue to develop, the market could get nervous again.”

The spread of Ebola could add to concern about the global economy in recent months after the World Health Organisation said 10,000 people a week could be affected by the disease by December.

Pengana Capital portfolio manager Tim Schroeders said that while sliding oil prices could eventually give a growth impulse to the global economy, the recent plunge in prices was another sign of the weakening global demand that has upset the sharemarket in recent weeks.

“There has not been a lot of conviction this week and we are to a degree in the eye of the storm,” he said.

“The disparity between the best and worst performers in the sharemarket has been quite large. But there’s still a pervading ‘buy the dips’ view on the banks as people still remain yield-focused, and with US 10-year yields falling below 2.2 per cent, there is every reason to think that way.

“I’m not sure there has been a lot of conviction to the moves this week. Short covering and switching of exposures from energy to iron ore stocks have been the main interest in the market.”

For Nader Naeimi, AMP Capital’s head of dynamic asset allocation, Australian shares were building a base, although he wasn’t ruling out a further sharp decline.

“Until US shares show clear signs of ending the sell-off, our market will remain vulnerable, but the resilience this week has been quite pleasing and that reflects our recent underperformance,” he said. “Although the S&P 500 has cracked major support, we do have the most oversold condition in our market since 2011.

“If the S&P 500 is doing a 20 per cent correction, it won’t happen in a straight line, and we could even push back up to the recent high first.

“What happens from here is very important, because if it goes any lower from here, it will become a crash, and I don’t think that will happen.”

Hedging dollar bets

IN a vote of confidence in the Australian dollar and a potentially positive sign for Australian dollar carry trades, including high-yield equities and bonds, AMP Capital fund took profit on a short Australian dollar position last Friday by increasing its hedge ratio.

The fund, run by AMP Capital’s Nader Naeimi, had been underweight, or short, the dollar since early September, based on expectations of a downward adjustment in the exchange rate to reflect persistent weakness in commodity prices.

But Mr Naeimi said technical indicators on the dollar were now “very oversold” and iron ore prices had stabilised.

“September’s big fall in the Australian dollar has improved the valuation score,” he said.

The dollar has been supported near a four-year low of US86.5c this week, helped by stronger iron ore imports from China.