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Christine St Anne is Morningstar's online funds and ETFs editor.

At last year's Morningstar investment conference, Independent Franchise Partners (IFP) founder Hassan Elmasry likened Australian equities to a call option on China.

As a global equities manager, Elmasry was slightly sceptical over Australian investors' bias towards domestic equities. By sticking to a domestic bias, investors could be missing out on a raft of global opportunities. According to Elmasry, this approach could leave Australian investors with a portfolio that is essentially a "call option on China".

"Australia is sitting on a call option on China - if you feel very safe about that, then don't diversify," he said at the time.

Australia's economic success is indeed tied to China and Asia. In 2010, well over 50 per cent of its exports were made to Asia.

The volatility of Australian equities is also starting to mirror that of emerging market equities.

As graph 1 highlights, over the past few years the volatility between Australian equities and emerging market equities has started to converge.

"This has made Australian equities more volatile. Australia is also closer to China and Asia compared to the rest of the world. To outside investors, Australia is now seen as a quasi-play on China," Morningstar co-head of research Tim Murphy says.

Australia Equities - Elevated Risk

Rolling Three-Year Standard Deviation of Australian, International and Emerging Market Equities

Source: Morningstar