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Growth assets more attractive

Growth assets more attractive: Mercer’s medium term outlook

Tuesday 16th November 2010

As defensive assets such as government bonds move into overvalued territory, medium term investors should look to boost their growth assets, a Mercer report says.

In its Quarterly Market Valuation and Review, Mercer’s Dynamic Asset Allocation team concludes that global government bonds and global credit are overvalued. However the review, which looks at a two-year investment horizon, does rate New Zealand bonds as fair value.

“High quality global government bonds surged in the third quarter of 2010, driven by global investors who want more than the modest returns cash is offering, but are wary of moving higher up the risk spectrum. The yields are now lower than the level reached at the end of 2008, and it is real rates, rather than inflation expectations, that have fallen the most,” said Martin Lewington, Head of Mercer New Zealand.

Mercer has, in the past, suggested these global government bonds could provide ‘insurance’ against adverse economic outcomes, but Mr Lewington now says, “The cost of this insurance is becoming prohibitive, and we would suggest medium term investors take a more underweight position.”

Mercer also moved its view on global credit to ‘overvalued’, due to yields falling by over half a per cent. It continues to see New Zealand credit as fair value.

“Global corporate bond yields are now at levels last seen in 2003, and are beginning to look a little expensive. Nonetheless, compared to government bonds, they still have a relatively attractive spread,” Mr Lewington said.

The Mercer review rates both overseas and New Zealand shares, as ‘fair value’.

“Most major equity markets around the world, with the notable exception of Japan, rallied significantly in the third quarter – typically posting returns of 10 -15%. It is true the outlook for developed economies remains uncertain, yet serious talk of a double dip recession has waned, and the consensus for 2011 global growth remains above 3%.

“Ultimately, we see the outlook for global equities as finely balanced: positive valuation signals, particularly the wide gap between equity and bond yields, are offset by macroeconomic risks. Given the relatively poor performance of defensive assets, however, we have come down on the side of growth, and recommend going overweight in equities and other growth assets,” Mr Lewington said.

Mercer’s review rates the New Zealand dollar as unattractive relative to the US dollar, but neutral versus the Euro and the Japanese Yen.

“The New Zealand dollar has recently appreciated again the US dollar, with the NZD appreciating 7% over the quarter. However, this is primarily a story of US dollar weakness.

“Overall, the New Zealand dollar is overvalued against the US dollar and that eventually we will move closer to long term equilibrium levels. Our advice is to take advantage of current rates to buy unhedged overseas assets,” Mr Stuart said.

To view Mercer’s capital markets update video – go to


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