Australian Shares

• The market has recoiled back from the top of its six month trading range due to the re-emergence of three key risk factors.

• The first has been the flaring up of the sovereign debt crisis in Europe which has transmitted through to bank funding markets and corporate credits. These represent the signals that indicate confidence in financial markets is waning and if left unattended will infect the real economy.

• The second is the shift in Chinese policy making, which has made it much harder for people already owning houses or living abroad to buy property. This has triggered a sharp fall in transactions, which will flow through into property prices and sentiment in commodity markets in the near term. We see this however as a temporary respite in the commodity story as once the Chinese get the desired correction in property prices they will ease off on the restrictions and demand growth will resume.

• Finally, the domestic economy, which has been transitioning from stimulus-encouraged consumption towards investment, appears to be stuttering more than anticipated. Retailers are clearly struggling in the face of higher rates and the announced tax changes on mining risk triggering meaningful delays to investment spend.

• A quick resolution in some form to the current uncertainty is a pre-condition to a meaningful recovery in our market, given the flow-on effects of the sector onto other parts of the market.
  

• The uncertainty does bring opportunity though and the portfolio is seeking to take advantage of the drop in prices to add to positions, particularly in stocks exposed to the US economy, such as News Corp.

• We also believe that the near-term pipeline of pre-approved investment projects will underpin ongoing demand for the engineering sector and we maintain our exposure to this sector.

• Finally we see good value in those stocks exposed to the ‘back end’ of the economy, i.e. corporate spend and supply chains, such as Asciano.

Fixed Income & Cash

• The RBA raised the cash rate by 0.25% to 4.25% in April. At the time of writing it had raised it by a further 0.25 basis points to 4.50%, bringing the lending rate to households back to around average levels.

• Further monetary policy will most likely occur but the Reserve Bank may prefer to pause in the nearer term and assess the impact of policy tightening to date.

• External events that may affect the outlook for global growth will also be of interest. China recently tightened its banks reserve requirement ratio by a further 50 basis points in an attempt to slow down the local economy. Sovereign concerns out of Europe and any move in the terms of trade will also be monitored closely by the Reserve Bank.

• Sovereign risk in the near term will be the main driver in asset class performance. Risk premia required by credit investors will likely increase and may result in credit spreads widening - however it is extremely unlikely that this will be of the same extent as that witnessed following the demise of Lehman’s in late 2008.

• Bond yields are virtually unchanged from the previous month and we still believe that the RBA will continue to tighten monetary policy throughout 2010 and that 3 and 10-year bond yields at 5.28% and 5.71%, respectively, do not offer great value. It is for this reason that the Macro portfolio remains defensively positioned relative to its benchmark.

• Bond issues with an explicit government guarantee slightly underperformed their respective commonwealth government bonds. We remain aggressively overweight this sector and continue to expect this sector to perform 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.

• For credit, the economic environment has been improving strongly in the last quarter, especially in the US. Earnings should benefit from the rebound and could underpin the credit market.

• However, fiscal adjustments necessary in Greece and the UK for example will put a lid on growth in this region. Spill over effects on Spain and Portugal could trigger a deepening of the crisis in the next quarter.

• While we remain positive on the medium and long term on the credit asset class, we are mindful of the negative effects of the European crisis on the short term.

Listed Property

• At current prices, the sector is trading on a 13.7 x PE and is delivering a 6.0% distribution yield and 0 to 2% p.a. medium-term growth. Earnings and balance sheets are stable. We look to improving direct property and sharemarkets for the next leg-up in the sector.

• LPTs offer reasonable leverage to a gradually improving global economy, a reprise of inflation or to an improving sharemarket. Any one of these three factors would boost LPT returns in the longer term above our base case 8% total return.

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