Australian investors' bias towards local equities is justified due to the strong economy and robust earnings outlook for companies, according to a US economist.
"Australia is just ... 3.7 per cent of the MSCI World Index and 3.2 per cent of the MSCI All Country Index," State Street Global Advisors (SSgA) chief economist Chris Probyn said.
"Australian equity investors may then believe they need overseas exposure to obtain an appropriate level of portfolio diversification.
"However, recent economic performance and near-term prospects support a degree of home country bias."
He said that since market volatility began in April, Australian banks and cyclical industrials had underperformed, creating value.
"Mining also appears attractive, as it trades at less than 10 times one-year forward earnings and commodity prices should grind higher along with the global economy," he said.
"Even defensive industrials are trading at a below average price/earnings ratio, although this may reflect a structural de-rating and poor relative earnings growth.
"Earnings are forecast to grow a robust 32 per cent in fiscal 2011."
SSgA's multi-asset class solution team expected the Australian equities market to return an annualised 7 per cent over the next five years.
The country is "remarkably resilient" as it was one of the few developed nations that avoided a recession amid the recent global financial crisis and was enjoying a strong recovery, Probyn said.
"Gross domestic product is forecast to rise at an average 3.4 per cent through 2014, more than any G7 country," he said.
"Australia's system of franking credits also provides support for a degree of home bias.
"Looking at the economic backdrop, the financial backdrop and taxation issues, there are good grounds for a degree of home bias in the portfolios built by Australian investors."
Research house Zenith's associate director Ben Davis said investors needed to be aware of concentration risk in the Australian stockmarket.
"I suppose the prospects in Australia have been strong," he said.
"The only issue we would raise in response to that is probably a concern around the weightings in the Australian market, which are dominated by financials and resources."
Zenith had an equal allocation to both Australian and international shares in the equities component of its model portfolios.
