The Australian market is attracting interest and not only because of its perceived safe haven status...
The Australian market is attracting interest and not only because of its perceived safe haven status within the Far East. From 1997, fund manager weightings in the country rose dramatically as the Australian dollar and economy were spared the turmoil of the rest of the region. Even though its neighbours to the north are beginning to revive, fund managers believe the outlook for Australia is also improving in fundamental terms.
The benchmark stock market index, the All Ordinaries, has risen some 6.8% in local currency terms year to date, which translates into a 18.91% rise in sterling terms.
Gary Wright, head of the Pacific team at Norwich Union, says until the Asia crisis Australia was seen as unattractive when compared with the high returns available from the Tiger economies.
He adds: "In the past few years people have had to reassess Australia. It is still an attractive place to invest and it is a large stock market in the region. When Asia moves back to full steam ahead, Australia will still attract a reasonable amount of assets."
The economic landscape has gradually altered from a high inflation, commodity based country with collective bargaining for wages to one of the faster growing economies in the world.
Graham French, fund manager at M&G, says: "It has an English speaking, literate workforce, good accounting standards, well-managed companies committed to return on capital and all the things that investors look for.
"It has one of the fastest growing economies in the world this year and last year, while inflation is a non-event, it is a dead issue. Australia has a pro-business government in a clear democracy and more and more companies have American chief executives and American ideas."
John Payne, director of investment at Barings, says at a macroeconomic level the federal government and Reserve Bank of Australia have focused on maintaining lower inflation and improving productivity growth, which has outpaced the US in the past year.
Payne is also expecting the upside of the Australian economic cycle to last longer than on previous occasions.
He adds: "The US economy has surprised a lot of international investors on the duration of the cycle.
"Australia looks to be on the back of this and the duration of the cycle many actually last much longer than investors perceive."
Wright is fundamentally upbeat about the Australian economy with its 1% to 1.5% inflation level and low interest rates. The only cloud on the horizon is the current account which is now around 6% of GDP due to weak exports into Asia, according to Payne.
He says: "The concern rests with the current account deficit and how far will it deteriorate. It is getting around the level where international investors get worried about Australia."
Because the deficit is largely due to weak exports rather than out of control import consumption it is expected to decrease as exports rise with the recovering Asian economies.
Norwich Union has a £150m exposure in Australia with one third of that in the major Australian banks. There is also quite a big exposure to Australian mining stocks particularly the large diversifieds such as BHP Co, Rio Tinto and MIM Holdings.
Wright says: "The environment for base commodities has a potentially meaningful upside in the next 12 months with a return to synchronised global economic recovery. We should see an increase in demand for base commodities."
M&G likes telecommunications giant Telstra as well as Commonwealth Bank of Australia, Melbourne-based bio-technology group CSL, resources stocks and media groups.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation