The Australian Share market faces some short term headwinds. The enduring strength of the Australian dollar, the impending fiscal tightening and the completion of QE2 in the US, higher oil prices and the looming spectre of inflation across the globe have all tempered optimism. Furthermore there is concern that the resource sector is susceptible to a fall due to corrections in commodity prices in what is an uncertain global environment.

However, we remain positive about the amount of opportunities currently available across the spectrum of the market. We may well see a rotation out of resource related companies as risk appetite wanes but this is likely to provide sound buying opportunities at attractive valuation points. This is particularly the case for those companies that are exposed to the significant amount of investment in resource infrastructure projects that is currently taking place in Australia. This is likely to be the source of significant earnings growth over the next couple of years and we believe that this domestic investment will be a key factor in driving the economy forward. There are very positive developments in the LNG industry in particular and Sinopec’s recent binding agreement with the APLNG joint venture is a significant milestone.

The domestic economy does continue to struggle. Credit growth remains lacklustre and consumers remain focussed on saving rather than spending. The prospect of further interest rate risks later this year is unlikely to change that sentiment. We believe the multi-speed economy will continue to weigh on a number of domestic sectors notably steel and residential construction. Where we see some emerging opportunities is in some of the defensive names which have lagged the market for some time and offer attractive valuations.

In debt markets, whilst short term issues with peripheral European sovereigns remain, from a fundamental perspective, we are positive on credit markets in the medium to long term. Leading indictors are looking more positive, balance sheets are strong, earnings continue to improve, equity volatility is low, defaults are falling and valuations are appealing on a historical basis.

While inflation remains a risk and ddespite the Australian inflation data being stronger than expected, we do not view the Reserve Bank as likely to tighten monetary policy further in the near term. The Reserve Bank has always maintained that it will look through the short term effects of the floods in Queensland and Victoria and Cyclone Yasi. Should inflation data released in late July confirm that inflationary pressures are emerging and higher than what the Reserve Bank is comfortable with then further policy tightening will most likely occur in the third quarter of this year.

Fund Manager Commentary