By Andrew Nelson

According to a recent outlook paper from Russell Investments, the majority of Australian investment managers believe the S&P/ASX300 will finish 2012 higher than where it started. Russell's quiz of 40 investment managers not only showed the bulk of managers were positive, but nearly 50% predicted gains of 10% or better over the course next near.

On the other side of the coin, another 20%, or so, of those surveyed saw a positive new year with less than 10% gains, while about the same thought the market would end down, but less than 10%. The big bears were scarce amongst the fund managers, with only 2% predicting losses of 10% or more, while about 6% were undecided.

Russell Investments' Greg Liddell, who is the group's MD of Consulting and Advisory Services, thinks the positive outlook was primarily based on valuation grounds. He notes many of the surveyed managers still feel the local market was still fairly, or under-valued. In fact, he points out that not one fund manager surveyed this quarter thought the local sharemarket to be overvalued.

However, the survey did show that the enthusiasm was far from unbridled, with fund managers tracking a number of issues that have been in play for the past few years. Elevated market volatility and the deteriorating situation in Europe were listed as the two biggest threats to local market performance in the year ahead.

"Those managers who were more bearish on the local market outlook were primarily concerned about a contraction in Europe, and the repercussions that has on global players including China and in turn, Australia.

"Overall though, managers appear more bullish than bearish on the outlook for 2012 and suggest valuations are attractive at the moment for those investors ready to take advantage," said Liddell.

The financial capacity still available to the RBA, a luxury shared by few other central banks, was another bright spot on the radars of fund managers. However, reactions were mixed about the latest bout of easing from the RBA.

Liddell points out that the 25bp cut in November actually served to lower managers' confidence in Australian bonds and cash. The survey indicates that both of the aforementioned investment classes saw a reduction in the number of bullish managers and an increase in the bearish.

In fact, the survey showed that there was an increased level of caution across the board, with bearish sentiment increasing to a greater, or lesser extent across all asset classes.

There was some out-and-out confidence, with managers drawn to consumer-related sectors. Liddell thinks this is quite possibly due to the November interest rate cut and hopes for further cuts in this month and over next year. Valuations in the sector are also being seen as being fairly attractive, notes Liddell.

Yet it was consumer staples that held the fixed gaze of the fund managers, with bullishness at 50%. This is up from the 35% posted in the previous survey. Lastly, the survey shows a lot of hope for consumer discretionary stocks, not out of place at all this time of year. The survey indicated that positive sentiment for the sector rose to 40%, while bearish sentiment shrank from 50% to 20%.