Australian equities attractive in the long term
Australia’s strong economic position post the financial crisis has generated positive returns for investors during the past 12 months however, headwinds in 2013 will mean lower returns for investors with too much home bias, according to BlackRock’s Global Chief Investment Strategist, Russ Koesterich.
Visiting Sydney and Melbourne this week, from San Francisco, Mr Koesterich said Australia’s exceptionally low debt burden, budget that is close-to-balanced, profitable corporate sector and sustainable superannuation system made it an attractive long term play.
In the short term, Mr Koesterich said four factors may adversely affect Australian equities, increasing the need for investors to ensure their portfolios are not disproportionately home-biased.
Australia is not as cheap as it was six months ago. Australian equities are trading for nearly 2x book value. While this represents a discount to US stocks, Australia is now trading at a premium to most developed markets.
Growth remains soft. Australia has been hurt by falling commodity prices, particularly for iron ore. This drop in prices has had a negative impact on Australia’s terms of trade and has undermined the country’s business investment and household income.
Australia has become a two-speed economy. Australian monetary policy has become complicated by the fact that the country’s mining sector is growing at a very different rate than the rest of the economy. After an aggressive round of rate cuts, the Reserve Bank of Australia is taking a pause to determine if its recent policy easing will be sufficient to ensure a pickup in the non-mining sector.
Australia has an over indebted consumer. One factor holding back the non-mining portion of the economy: too much consumer debt. Australian consumers are in the process of repairing their balance sheets, much like US consumers. As this process unfolds, consumption will remain soft.
Mr Koesterich said: “For investors focused on the longer term, Australia has many factors in its favour. Australia suffers from fewer long-term economic imbalances than the United States, Europe and Japan. In addition, thanks to its large banking sector, Australia offers the second highest dividend yield among developed countries. In light of the country’s benign inflation outlook and attractive budget situation, Australia still has more monetary and fiscal policy flexibility than many other developed markets.”
“However, with Australia now trading at a premium to most developed markets, I am currently recommending maintaining a benchmark weight to the Australian market and encouraging investors to add international investments to their portfolios to avoid home bias,” he said.
Home bias is the tendency of many investors to allocate larger proportions of their portfolio toward securities in their home country, forgoing the benefits of a well-diversified global portfolio. Notwithstanding the franking credit benefits for local investors, an investor’s perceived familiarity with “local” companies or investments leads to over-confidence in the ability to invest in those companies compared with unfamiliar foreign companies or countries.
Mr Koesterich said: “We are already seeing some Australian investors expanding into international equities to diversify their portfolios. Witness the recent strong flows into Australian-listed ETFs that invest in international equities. Australian investors should consider taking advantage of the relative strength of the Australian dollar by investing in overseas assets. Global equities look increasingly attractive as a source of income.”
Mr Koesterich’s comments formed part of his latest outlook on a group of countries he refers to as ‘CASSH’ – Canada, Australia, Singapore, Switzerland and Hong Kong.
