Aon questions fund managers' arguments

Aon Consulting, in a recent newsletter, has questioned if fund managers know what they are doing and is suggesting that some of the arguments put forward for the markets to rise are unlikely to happen.

The first argument put foward is that this is one of the longest bear markets on record, and, on a statistical basis, markets should therefore bounce soon.

Aon says sentiment drives the market not statistics. A rise won't happen until sentiment reverses.

Another argument fund managers use to support continued investment in equities is that the difference between the

bond yield and the expected earnings yield on equities is as large as it has been for a long time. This means that

equities may be undervalued relative to bonds.

Its analysis of this argument questions the accuracy of price/earnings ratios and whether people can be certain about the earnings numbers used.

The third argument for a market bounce is "gdp growth argument".

This states that GDP growth predictions for 2003 are higher than 2001 and 2002. Throw in the amount of

monetary stimulus being created by central banks around the world along with the fiscal stimulus in the US and clearly there must be an upward movement in the equity market.

Wrong. Aon reckons growth hasn't been too strong and much of it has come from government spending not corporates.

Aon concludes that markets are likely to stay flat, or fall, in the short term as opposed to rising.

"Because of the high P/E ratios, worldwide reliance on the US economy, and current low levels of investor confidence, we see an equity market that tends to be flat to falling as opposed to flat to rising over the next 12 months and possibly beyond.

"Over a 5 to 10-year term we do see it more than likely that returns in overseas equities will perhaps be around 9%pa gross on average, but certainly not in the immediate future."

Helpfully the firm does provide a cavaet saying it can't predict where sharemarkets will go and says they could rally substantially if solutions were found to some or many of the problems.

"However, the evidence we have seen leads us to conclude that it will not be an easy time for equity markets

with the difficult economic factors exaggerated by geo-political tensions and high oil/energy prices and that uncertainty could last longer than many are suggesting.