Australian investors should revise their portfolio allocation and offshore exposure in light of the market and political changes facing Europe, a number of investment managers have said.
In the wake of leadership problems in Greece and Italy, as well as sovereign debt and banking system issues, local investors need to turn their focus on greater diversification and companies with quality earnings and accept low returns are likely to stay.
UBS Wealth Management Australia head of investment strategy and consulting George Boubouras said that as market uncertainty in the medium to long term was not going away, he recommended investors review their portfolios and "lighten the load".
Boubouras said investors needed to understand what asset allocation they had, particularly since volatility had been elevated following the global financial crisis.
He said they needed to also consider their portfolio's expected return; how much risk they were undertaking to meet the expected return; and whether the investment was meeting their expectations and if not, why.
It was also important to diversify portfolios from cash and fixed income, equities, real estate investment trusts or alternatives, he said.
"If you don't like those asset classes, strip it out and do something that you understand, but diversify and look at any rally in that risk asset market," he said.
In Colonial First State Global Asset Management head of investment markets research Stephen Halmarick's view, if the situation in Europe continued, it was going to result in 25 per cent of the world's economy slipping into recession, or close to it, over the next few months. In any case, Halmarick said Europe was a source of ongoing instability.
"The issue for Australia is that our direct linkages into Europe are pretty small, but clearly we're a very open trading economy and our financial markets are very highly linked into the rest of the world, so obviously [it's] affecting us here," he said.
"So what's happening in Europe is part of one big picture of developing economies where we think the economic growth coming out of those parts of the world over the medium term is going to be extremely low."
As a result, he said growth out of those developing economies would be around 2 per cent or lower over the next few years, which would have three implications for Australian investors.
"One is investors will just have to accept a lower return on investments than they have in the past, so that's a difficult message I think for investors and planners and managers. We think that's just reality," he said.
"Secondly, the need for portfolio diversification is even greater than it has been in the past because you're going to have ongoing periods of increased volatility and continual reassessment of the macro-economic outlook, and the government's ability to confront those challenges with policy is much more limited.
"Thirdly, that means given all the structural changes in the global economy [the rise of Asia], investors need to look at both countries and companies that are facing where the growth of the world will be, so the thematic way of investing is going to become an increased focus."
