While Far Eastern economies are thriving in the current market, investors in the region have realloc...
While Far Eastern economies are thriving in the current market, investors in the region have reallocated their investment to areas supported by strong domestic demand, such as South Korea and China.
As a result, they are reducing their exposure to the Australian economy, which has tended to move in line with the US. Growth in New Zealand, on the other hand, has not stalled and the outlook remains positive.
Since the 1997 and 1998 Asian crisis, investment in Australia has provided less risky exposure to the Australasian region. However, as the Asian economies flourish on rising domestic markets and renewed liquidity, less investment is being poured into Australia. Moreover, with strong growth in the past years, Australian stocks are now looking expensive.
Charles Heenan, investment manager of the Asia Pacific team at First State, says: 'Australia has been in a growth stage for the past eight years. The Australian economy has tracked the US and, with the fall in world markets, is starting to show signs of a slowdown.'
Consumer demand and the housing market have been doing well but, Heenan says, the corporate sector is slackening. As a result, First State has around 12% of its portfolio in Australian investments. According to Heenan, there are better opportunities in the Far East excluding Japan region.
He says: 'Australia and New Zealand have more transparent systems than Far Eastern economies and exposure to Australia has served the purpose of diversification against risk. But we are finding very few stocks in which to invest in the region and better opportunities in Asia.'
He believes growth sectors such as healthcare, pharmaceuticals and banking are overvalued. He is also concerned the banking sector has been chasing growth in the mortgage sector but, as volume and demand increases, margins are becoming less attractive.
While the New Zealand region has been a strong performer, it is a small market compared to those in Asia and the West. Nevertheless, the economy has defensive qualities, that are proving attractive in the present market, while also offering better security against the Far Eastern markets.
Charles Rawson, manager of the New Zealand Trust at Exeter, says: 'In an investment portfolio, New Zealand is often kept as an alternative asset class because of its defensive nature. It tends to underperform world markets in growth cycles.
'However, when Asia is underperforming, New Zealand will outperform the region, so it is a good sector to hold for hedging risk against Asia and Western markets.'
While the US has reduced interest rates to boost growth, New Zealand has raised interest rates in order for the central banks to keep to their strict inflationary targets and hold the consumer boom. Rawson says inflation is not a concern but the Central Bank is worried it might take off due to rising demand for consumer products and housing.
Another positive change for New Zealand is the shift in government policy. 'The government is sponsoring a new fund, NZ Super Fund, designed to help pay the rising costs of pensions over 30 years,' says Rawson. 'It has estimated around NZ$300m to be allocated to the fund every year, underpinning demand for domestic equities.'
Consumer demand strong in Aus and NZ.
Aus and NZ are more transparent economies.
New Zealand is a defensive economy.
Australia's corporate sector is weak.
High valuations in Aus driving investors away.
NZ a small market so limited oppportunites.
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