Morningstar analysis questions home bias

Australian investors have been reminded that their exposure to domestic equities remains high when compared to their peers in other in countries.

Morningstar market strategic, Lochlan Halloway has used his latest analysis to caution that the Australian equities market looks more expensive than usual, particularly the large caps.

He noted that Australian equities are trading 8% above fair value in circumstances where the Australia market already ranks amongst the most expensive across Morningstar’s global coverage.

“Fortunately, investors are not constrained to our shores,” he said. “The ASX is home to $121 billion of global equity exchange-traded products, roughly twice the size of domestic strategies. Despite this, Australian portfolios are still heavily skewed to the local market.”

“State Street found domestic shares account for 44% of the average superannuation portfolio, even though Australia accounts for less than 2% of the global equity market. A familiarity with the local investing landscape, and the allure of franking credits, doubtless contributes to the home bias,” Halloway said.

He said there is no definitive answer to how much an exposure an investor should have to the local market, but that the average allocation seems high.

“And this comes into sharper focus when our market looks over-priced,” Halloway said.

Halloway’s analysis suggested options such as US equities while noting that the US market is trading 4% above fair value and that the election of President Donald Trump represents a wild card.

He said value abounds across Asia’s equity markets, with stocks covered by Morningstar at a discount of around 6% while European equities are trading at a 5% discount to fair value.

“This isn’t particularly cheap compared to the bargain territory of the past two years, but excluding Asia, it’s the most attractive region we cover,” he said. “Value is particularly pronounced in the UK: at a 10% discount, it’s the cheapest developed market globally.”