Despite the recent turmoil and market volatility, it is too early to determine whether the debt crisis in Europe and the USA will plunge the global economy back into recession, according to Mercer's head of dynamic asset allocation in Australia and New Zealand, David Stuart.
He recommended investors keep to long-term asset allocation benchmarks for riskier growth assets and rebalance as required.
"Although investors might be tempted to trade the peaks and troughs, this is a risky approach. In the current environment, we believe investors need to focus on their long-term investment targets," Stuart said.
Stuart defines 'long term' as being over the next 20 years.
"Now is not the time to be a hero – investors need to tread carefully and focus on the bigger picture," said Stuart. While there is a place for dynamic asset allocation [ie, medium term] changes, investors should not lose sight of long-term relationships. Equities have outperformed bonds and cash by between 4-6 per cent over the long term, he said.
"Emerging market equities have a positive, longer-term structural story, and recent underperformance has restored valuation opportunities," Stuart said.
Both global and Australian small caps retain an 'unattractive' rating.
"We have warned for some time that small caps were overvalued and investors needed to be careful, which has proved to be the case," said Stuart.
Mercer believes current low yields for global government bonds are unsustainable over the medium term and within defensive assets cash is the preferred asset, with investment grade credit and Australian government bonds having stretched valuations, he said.
