In a time of global uncertainty and volatility, it is no wonder Australian investors are hesitant to take risks and instead continue to cling to their domestic investments. But market participants could not stress more the need for investors to diversify their portfolios.
Opportunity seems to be the key word resounding from the market and the view that if investors want to actually make any money, they need to invest in international equities.
The strong Australian dollar is one factor that is starting to drive investors towards international equities.
"It's like buying a Louis Vuitton handbag for half the price. So why just buy the handbag; why not just buy the stock? It is that type of thinking now with people saying 'I think there are better assets out in the world'," Certitude Global Investments chief executive Craig Mowll tells ifa.
The global financial crisis (GFC) has caused assets to be undervalued, which combined with a high Australian dollar makes international investment too good to pass up.
"The only way anyone will make money in this world is to buy good-quality assets at a good price," Mowll says.
"People are realising that not only are [international equities] cheap, but they're really cheap for us because of the currency."
Magellan Asset Management head of distribution Frank Casarotti told ifa that advisers should take the opportunity to try and tilt their clients' portfolios in the direction of international equities.
"The thinking adviser realises that the currency could be their friend over the next two or three years. Owning international assets in an unhedged environment could be quite a good strategy," Casarotti says.
Playing the strong dollar by investing in unhedged investments is also a strong way to protect against portfolio volatility.
"Unhedged exposure dampens volatility, so when you add international equities to your portfolio, you're decreasing volatility," Morningstar Australasia co-head of fund research Tim Murphy tells ifa.
Another factor in favour of investing offshore is investors being driven to look for income alternatives following frozen income assets and being overweight in domestic assets.
Australia has about 1.5 per cent of global market capitalisation, which makes it a very small market compared to what is available globally. It has an almost two-sector investment: financials and resources. If investors shy away from international equities, they will end up being overweight in Australian equities and also overweight in these two sectors, leaving the portfolio open to risk.
"Internationally there are none of those risks because you can go where you want and still get a very diversified portfolio, so that is the biggest reason I think people should be hesitant about being overweight in Australian [equities]," Wingate Asset Management chief investment officer Chad Padowitz tells ifa.
When investors look globally, they can pick up a range of other sectors, which is important for investment purposes. Ideally portfolios should cover a range of sectors and regions.
"It's an opportunity that is too good to miss. There are economies like [China and India] which continue to grow in a GFC when the rest of the world is in recession. It's obviously somewhere to have your money," Fiducian investment manager Conrad Burge tells ifa.
But despite the push for investors to broaden their portfolios, they should not opt out of Australian equities altogether, HSBC Bank Australia head of savings and investments Mike Danby tells ifa.
"I would say it is more a function of a collective diversification strategy out of cash rather than an absolute move away from Australian equities," Danby says.
What does this mean for advisers?
Advisers need to be able to recognise investment opportunities outside of the Australian market, make clients aware of these opportunities, then encourage them to diversify their portfolios, tilting them towards offshore equities.
"My advice to advisers would be to encourage investors with something of a risk appetite left to make sure that they have some exposure to [international] markets," Burge says.
"The actual amount of exposure will vary from investor to investor and it is the job of the financial adviser to help the investor work out how much exposure they can tolerate."
While the European Union debt crisis is unresolved, the United States is in the midst of recovery and there is rumour of a potential slowdown in China, the need for advisers to be thinking about strategic asset allocation is even more important than usual.
"All these things are lining up and it may be that the adviser can conclude that from a strategic asset allocation perspective, it may not be a bad tilt to a client portfolio to be exposing them to quality international equities in an unhedged strategy," Casarotti says.
Advisers are faced with re-educating their clients and making them aware of the growth opportunities available. Reassuring clients and getting them comfortable with international equities will be a difficult task in itself owing to fears traditionally associated with these markets.
"We've taken a hit, we've moved to term deposits to safeguard what we've got, but we've now got to go out and start to look for the re-growth of that market for the longer term," Mowll says.
"The only way you can do that is to buy quality assets at a good price.
"[Being an adviser is] a hard job because you're dealing with serious emotion, but logically you've got to look for quality assets and long-term growth and now is as close to a perfect time to get out there and invest.
"Things have reversed; it's actually having the courage to realise that now is the good time and there are opportunities there."
Understanding and discussing areas for potential equity investment, taking into consideration a client's risk appetite, is also key for advisers.
"The valuations in Asia are really attractive now. After last year's fall in the markets we've got to the point where the valuations are getting too cheap to ignore, so it is something they should be considering if they've held off for whatever reason," Fidelity portfolio manager David Urquhart tells ifa.
"They should actually be thinking about doing it now because you are getting it at a time when valuations are very attractive.
"I think all the risk factors have largely been [about] price. Risk factors about inflation in China and India have certainly been well recognised and I think the great news is that China has quite a bit of success in leading or getting inflation back down to their target level," he says.
Murphy says broader diversification is certainly an effective way to combat portfolio risk.
"When you're building a portfolio you want to protect against a 'black swan' event, so to speak. So dulling that down and having broader diversification in international equities is important," he says.
Outlook
Appetite for investment in international equities is expected to grow as investors realise the importance of a diversified portfolio and the opportunities offshore markets can give an Australian investor.
"It's going to play out until at least 2050, I probably won't even see it out. I think that's what people have to understand, the way that we're asset allocating actually has to start to change a bit," Mowll says.
"Now is really good timing, a great way to get your tail in the water is to go global and develop your portfolio."
Most advisers will quickly realise portfolios are too heavily biased towards Australian funds and assets, which is great while Australia is booming, and they need to be more diverse.
"I think it's going to be an ongoing trend where advisers weight client portfolios to achieve specific retirement outcomes. I think most advisers are going to be revisiting their portfolio weightings," Casarotti says.
"It's about quality assets, not just diversifying for the sake of diversifying. [People] just need to go out and find fantastic companies."
Investors have been rightly cautious about international equities, heightened by the economic downturn in Europe. But news of US economic growth and gross domestic product growth in China may help investors realise that the situation in Europe is not going to drag down economies in the rest of
the world.
"That's actually a good thing for people who invest in equities [overseas]," Urquhart says.
"The US is still the biggest economy in the world and it helps the second biggest economy [China] so [it] will at least give some kind of growth.
"It gives more balance and a bit more diversification, which should mean [growth] is more sustainable."
Burge agrees that forecasts of accelerated growth and investment in economies such as the US, China and India will help the trend continue.
"Investment is the key growth dynamic and pushes growth forward," he says.
"This is a very good sign for growth ... and should be a good indicator in coming years."
Some note that volatility could continue in emerging markets, but urge that if investors want to take advantage of these assets, then they need to accept some risk.
"As money gets flushed out of safe assets, they will look to find the return. As an asset class, the only real place where the possibility of a reasonable return that meets long-term objectives is probably the equity space, but you are going to be forced to live with volatility," Padowitz says.
HSBC's view is that economic growth is likely to remain under pressure and market volatility will continue in 2012 as developed economies start austerity measures and inflation remains a threat to emerging markets.
"Asia may be impacted by the volatility, but the strong fundamentals mean we don't want to lose sight of the opportunities that exist in this volatility," Danby says. WHERE SHOULD YOU INVEST?
The key to investing offshore is to consider diversifying a portfolio in a range of sectors and regions. Advisers should encourage their clients to choose funds that are broad-based mandates that are well diversified.
"Trying to pick a single region, country or sector is fraught with danger because people tend to buy and sell those types of things at the worst possible time," Morningstar Australasia co-head of fund research Tim Murphy says.
"Increasingly the theme is if you're looking at investing, to not so much focus on the regions but the sectors."
Sectors such as healthcare, consumer goods, IT and pharmaceuticals offer competitive prices and potential for strong growth.
UBS Global Asset Management head of global investment solutions Curt Custard says: "I like emerging markets, I like credit, I like US corporate credit. There are a lot of things that are 'money-good'. That's what you want; if you invest for five years you want your money back plus a return.
"Anytime there is volatility, that equals opportunity."
From a regional perspective, emerging markets are a key area for investment, particularly in Asia, owing to strong growth, which makes attractive opportunities.
"Within Asia, China is a standout. Chinese equities are still trading on multiples that are below their five-year average, making them look particularly attractive for investors prepared to take a long-term view," HSBC Bank Australia head of savings and investments Mike Danby says.
But although equities in Asia and India are good value, investors should still aim to consider the biggest opportunities available on a global basis.
"There are some stocks in China which are very good, but they're a little bit more expensive than buying a very similar stock with great possibilities out of Europe. Our measure is actually overweight Europe right now just because it's just priced so well," Certitude Global Investments chief executive Craig Mowll says.
