Australian investors seeking yield from equities have high levels of concentration to certain sectors, according to State Street Global Advisors.
In a note to investors, the company said that yield opportunities in the Australian share market are “concentrated in a small number of sectors”, which are led by a select number of large companies.
“The Australian equity market is heavily weighted towards just a few sectors — primarily materials and financials. Together, these two sectors make up almost two-thirds of the Australian market by value, compared to less than 25 per cent of global markets outside Australia,” the company cautioned.
“Meanwhile, higher yield sectors such as utilities, telecommunications and financials are dominated by a few large companies, increasing the concentration risk of purely domestic portfolios.”
State Street Global Advisors said investors should consider diversifying offshore to remove or minimise this concentration risk, as well as guard against any decline in Australia’s recent “outstanding economic performance”.
“Over recent years the Australian economy has been highly resilient, underpinned by strong demand for resources and the strength of the Australian banking system,” the company said.
“As we look forward, however, we see the US, European and broader global economies strengthening, while the Australian economy is affected by a range of concerns.”
These include China’s slowing resource demand, record property prices, constraints on consumer spending as the government increases austerity measures, and more fully valued banking stocks, State Street Global Advisors said.