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Equity prices of CASSH economies undervalued, says global strategist

Announcement posted by FCR (Financial & Corporate Relations Pty Limited) 14 Feb 2012

Sydney, February 14, 2012 – US-based global investment strategist for BlackRock’s (NYSE: BLK) exchange traded fund business, iShares, believes thatthe equity prices of the smaller developed countries, including Australia, are undervalued.

Russ Koesterich, iShares global chief investment strategist
, and the keynote speaker at the PortfolioConstruction Forum Markets Summit today, outlines that Canada, Australia, Singapore, Switzerland and Hong Kong – a group of countries he has collectively coined “CASSH” – are less burdened by debt and structural deficits, and for the most part should enjoy better growth prospects.

Mr Koesterich said, ”Although we still believe that the global economy can avoid another recession, our conviction is lower than it was six months ago. This change reflects the continued failure of policy makers, on both sides of the Atlantic, to address lingering sovereign debt issues.

“The key risk continues to be Europe, but risks have also grown in the United States. While the economy re-bounded in the third quarter last year, the prospect for fiscal drag in the US, both this year and next, raises the risk of a stalling economy,” he said.

He noted that US consumers have a long way to go in repairing their balance sheets. “Despite three years of consumer de-leveraging, consumer debt levels are still too high at 115% of disposable income. To bring consumer debt levels back to their twenty-year average would require another two to three trillion dollars of deleveraging.

“Additionally, hourly wages in the US are growing at barely 1.5% year-over-year, the slowest rate of growth since2004, and wage growth is now 1.5% below headline inflation, creating one of the widest gaps since 1991.

“In comparison, the CASSH economies have recovered more quickly, and are expected to grow at an average 2.7%, almosttwice the average rate of the United States, Japan and the Euro region,” he said.

“The CASSH economies have lower fiscal deficits, averaging less than 1% of GDP in 2010, versus an average of 7.5% in the United States, Japan and Europe. Gross public debt is also much lower in the CASSH countries – 55% versus 135% in the larger developed nations.”

Mr Koesterich also notes that the better financial position of the CASSH countries is reflected in BlackRock’s Sovereign Risk Index, a proprietary index that measures the riskiness of sovereign debt. While there is no rating for Singapore and Hong Kong, the other CASSH countries ran in the top 10 globally: Switzerland is ranked third, Canada fifth and Australia eighth. In contrast, none of the large European countries, the United States, or Japan make the list of the top-10 safest countries for sovereign debt.

“Investors worry about the unfunded liabilities that a country, including the United States, owes to its own citizens. It is interesting that, for the most part, the CASSH countries appear to at least have more sustainable pension systems. Australian workers, for example, have more money invested in managed funds per capita than any other economy.

“Having established that the CASSH economies are on average likely to grow faster, benefit from a stronger fiscal position, and are generally more profitable than the larger developed nations, these countries arguably should trade at a premium compared to other developed nations,’’ he said.

“Today, despite better fundamentals, the smaller developed countries trade at virtually the same P/E ratio as their larger counterparts, i.e. 11.5 x next year’s earnings.

“Despite these advantages, investors can pay approximately the same price for a dollar of earnings in the CASSH countries as they would for the same cash flow in the United States, Europe and Japan
[1]. To the extent investors are getting better fundamentals for the same price, we believe they could consider an overweight to these markets in their equity portfolios,” he said.

ENDS