Australian Shares

• The rally in sharemarkets off their recent lows has reinforced our view that we remain in a consolidation phase. The market has re-rated back to its long-term valuation, contingent on a recovery in earnings of 20% in the 2011 financial year. The confidence in this earnings recovery which will drive markets from here.

• We believe that we will see a short-term step up in US activity but are concerned that this will be relatively short lived given the continued structural issues relating to debt in households and at the government level.

• The Chinese economy continues to grow but policy makers have sent a clear message that they will not aggressively tighten policy, reflecting their concerns about the uncertainty of the global economic environment.

• The domestic economy is transitioning from being driven by Government stimulus and the consumer towards growth coming from investment, particularly relating to the resource sector.

• In this environment, the portfolio's key exposures are to the Resource sector, but rather than concentrate it solely in mining stocks it is spread across a number of themes being bulks, energy and engineering services.

• In addition we are exposed to the "back end" of the domestic economy, that is companies exposed to greater corporate spend in the supply chain such as Qantas and Asciano.

• We are cautious for the near term on consumer-sensitive stocks as we see the effects of rising interest rates kick in.

• We expect there will be a growth pause for a few months as the consumer eases off, while the investment spend is still ramping up. However, strong growth should resume later in the year so long as the US does not deteriorate.

• The February reporting season provided a direct insight into corporate performance. It confirmed that the recovery in the domestic economy is flowing through, with the banks in particular benefiting from a drop-off in loan losses. Overall the continued improvement in balance sheets helps to reduce the risks from any future economic shocks and would suggest that M&A will become a bigger theme in months to come.

Fixed Income & Cash

• The Reserve Bank raised the cash rate by 25 basis points to 4.00% in March, the fourth 25 basis points hike in six months.

• At the time of writing the RBA increased the cash rate by a further 25 basis points to 4.25%. With interest rates remaining below average to most borrowers it is clear that more increases will occur unless there is a significant event to destabilise the global economy.

• Whilst sovereign concerns have increased, particularly more recently in relation to Greece, the Australian economy has been well served by strong growth in the Asian region. The improving terms of trade will also continue to provide Australia with a significant income boost.

• Bond yields have risen substantially and offer better value at current levels relative to cash rates. However, we believe that the RBA will continue to tighten monetary policy throughout 2010 and 3 and 10-year bond yields at 5.28% and 5.78% respectively do not offer great value. It is for this reason that the portfolio remains defensively positioned relative to its benchmark.

• We remain aggressively overweight in bond issues with an explicit government guarantee and we expect them to continue performing well as the government has withdrawn its guarantee to the banks and states. The lack of supply should cause spreads to continue to narrow relative to commonwealth government bonds.

• Moves by financial institutions in lending rates will also be closely monitored. Bank funding costs have increased more recently with the rise in underlying bond yields. Offsetting this has been the move by some institutions to lower the rate on term deposits.

• The current stage of the business and credit cycles remains constructive for asset markets. Liquidity conditions in the form of ultra-low short rates and continued private sector de-leveraging provide additional (albeit temporary) support across asset classes, especially credit.

Listed Property

• At current prices, the sector is delivering a 6.2% distribution yield and 0 to 2% p.a. medium-term growth. Earnings and balance sheets are stable. We look to improving direct property and equity markets for the next leg-up in the sector.

Read the full version of the March fund manager's commentary on www.btim.com.au/Fund Commentaries