Is it time for Australian investors to rethink their investment approach?
A recent Morningstar study shows how Australian investors compare to global peers.
Mentioned: BetaShares Western Asset Aus Bd ETF (BNDS), Tencent Holdings Ltd (00700), Bayerische Motoren Werke AG (BMW), BetaShares Europe ETF-Ccy Hdg (HEUR), iShares Core Composite Bond ETF (IAF), iShares MSCI Emerging Markets ETF (AU) (IEM), Vanguard FTSE Emerging Markets Shrs ETF (VGE), Volkswagen AG (VOW)
Australian investors have greater investments in equities compared with bonds and cash. Indeed, this approach puts them among the ‘risk takers’ compared with their global peers, according to Morningstar’s inaugural Global Investor Portfolio Study.
The study included an assessment of 14 markets across the world representing all key regions as well as two of the largest emerging markets China and India.
According to the Morningstar research, investors are more willing to take risks in their portfolios when they begin investing early in life in markets including Australia. This is because of Australia’s compulsory superannuation system—with defined-contribution retirement schemes also dominating other markets.
Like their peers in the United Kingdom and United States, Australian investors tend to build or are defaulted into more aggressive portfolios with higher equity weighting. In other markets such as Japan and Germany, investors are more conservative, taking lesser equity market risk with their portfolios.
Home bias was also a common theme in most markets and Australia was no exception and direct equities were a popular form of investment—consistent with investors in most markets. Homeownership continues to be part of the Australian psyche, making up a significant portion of overall wealth. Real estate is a popular approach to building wealth, with the taxation system providing incentives to property investing. Indeed, the chart below shows that Australian’s have the second highest household debt compared with other countries—Switzerland just tops the list.
Household debt as percentage of GDP
The results are not surprising. It is well known that direct equities are popular investments for Australian investors along with property.
However, with inflation ticking upwards and both domestic and global challenges ahead, should Australian investors rethink their approach to portfolio construction. It was a theme that was kicked off at the recent Morningstar Investment Conference for Individual Investors.
Matt Wacher, the CIO of Morningstar Investment Management provided a perspective on finding the opportunities in challenging times.
Here valuations matter and while Wacher believes that the 60/40 type portfolio is becoming more attractive once again, it might be time to look beyond Australian equities particularly with equities in some regions, trading at attractive prices.
According to Wacher, opportunities can be found in companies in Brazil, China, Germany and the UK, however, this approach is for investors with a long-term perspective.
“The best opportunities are found in these markets, but they also come with a lot of geopolitical risk. Investors need to take a long-term approach and look through the noise if they are to include these companies in their portfolio,” Wacher said.
Indeed, the chart below highlights the solid returns these equities are expected to provide over the next 10 years, compared with Australian equities.
These businesses such as Tencent (HKG:00700) in China and Volkswagen (XETR:VOW) and BMW (XETR:BMW) in Germany are trading at good prices because of the sentiment around these risks. For example, Brazil and China’s political upheaval, in China’s case, its state-based approach to regulating companies. Germany has challenges on the energy front given the Ukraine war and the UK is currently grappling with its crazy fiscal policy.
“These companies have the potential to provide good returns but operate in markets that can be very volatile in the short term. This can derail investors if they panic.”
Investors can access some of these companies by investing in emerging market ETFs or managed funds such as the Vanguard FTSE Emerging Markets Shares (ASX:VGE) or iShares MSCI Emerging Markets ETF (ASX:IEM) or the Betashares Europe ETF (ASX:HEUR).
After a period of rapidly rising bond yields Australian bonds should also be included to help with portfolio balance in a way that once again can protect investors against slower growth including the possibility of a global recession.
“With growth challenges ahead, owning bonds can provide a diversification benefit to investors. At the higher yields currently available, the income from a bond can compensate investors for some of the risk yields moving even higher. Bonds are also a great diversifier in a portfolio in a recessionary environment.”
For Wacher, Australians will continue to remain invested in the housing market. “People want to own the houses they live in.” For now, Wacher does not see any real risks to the housing sector, but that is only the case if unemployment does not significantly tick upwards.