Advisers' view: Is Australia part of the local market
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In the first of a new series Good Returns asks three advisers for their views on the question: "Should Australian equities be included in a portfolio as local equities?"

Wednesday, March 22nd 2000, 12:00AM

by Philip Macalister

One of the big questions facing advisers and investors currently is how should they categorise the Australian sharemarket? Is it part of an investor's international exposure, or should it be considered as part of the domestic equity exposure?
Good Returns has asked three advisers for their view on this question. Their responses follow. If you have a view you would like to share with readers go to the Discussion Forum. Click here to get there

Norman Stacey, Diversified Investment Strategies, Auckland
We regard Australian equities as 50: 50 hybrid of New Zealand and International investment factors, extending the inadequate NZ category to a viable sector. (We do treat Australia separately from a currency perspective).

a) Australasia should be treated as a single market for investment factors.
Both economies are resource-based trading nations, and both heavily reliant on Asian growth and prosperity. Both sharemarkets are dependent on foreign investor's sentiment for demand. Both markets/economies are relatively small and are bracketed together as Australasia by foreigners, typified in the "Morgan Stanley Capital international Europe Australasia and the Far East [EAFE] Index", of non North American developed countries.

The CER agreement, and dominance of bilateral tradereinforce that it is a single, integrated and co-dependent market.

Australia's dominant banking, mineral resources and heavy industry market constituents are vital components to a balanced economy. The single treatment complements obvious NZ markets shortcomings, permitting tactical rotation throughout an economic cycle - as is deficient if confined to the NZ market alone.

From a global investment perspective, Australasia is a single play on rising commodity prices in a synchronous global growth backdrop, and on Asia economic resurgence including Japan. In this context, the Australasian equities sector justifies a much greater allocation than combined market capitalisations might suggest.

Many Kiwis may retire to Australia, they highly qualified offspring may cross the deetch, and it is a logical investment consideration to have some dividends indexed to the price of Fosters, Barossa Valley and Aussie real estate.

Within the Australasian treatment, NZ is over-represented compared to its size. Some peculiarly NZ limitations, such as the higher tax-take/lower growth which NZ seems resigned to, are already reflected lower fundamental market valuations, providing better yields (those efficient little devils).

Imputation Credits against useless Franking Credits compound this bias to the NZ split for NZ investors.

b) Australia as International.
Most of the case for separate treatment hinges on artifices rather than economic factors. Australian Equities offer specific relief from NZ currency and political risks. These impediments are not immutable.

NZ just isn't big enough, liquid enough or diverse enough to constitute a stand-alone equity sector throughout the economic cycle.

Australasia is a valid and small but very attractive equity sector.

Peter Hensley, The Money People, New Plymouth
It depends upon an investor's individual circumstances and their investment goals and expectations. It is well documented that companies listed on the local bourse tend to favour providing dividends to their shareholders, rather than retaining earnings for growth and or increased shareholder value. Thus shareholders seeking growth opportunities are forced to look elsewhere for suitable investments.

The size of our local market, and its obvious liquidity problems are further issues, which require highlighting. Our market capitalisation is approx $50 billion spread over 260 companies. Compare this to Australia which is larger by a factor of four, or America where Coca Cola has a market capitialisation twice our total market.

Because of proximity, culture and CER, Australia has to be considered as part of the local share-market.

Another obvious statistic, often quoted, is the size of our market when compared on a global basis. We don't even rate. When local investors visit Australia they find that the only way to find out about the NZ market is to check it on the internet because it is not reported in the local press.

An Australian investor would not consider placing 15 % of their portfolio in New Zealand, neither would one based in Fiji.

If an investor has an appropriate currency management / hedging facility (available thru all NZD$ based managed funds) then it is my belief that Australian Equities should be mixed with New Zealand equities to provide an appropriate level of exposure to the "on-shore" asset sector.

Ian Watson, Gilchrist Burns, Te Aroha
The New Zealand sharemarket is like a small restaurant at an exotic resort. Dependent on seasonal tourists who are fickle diners who only eat mains and leave when the bars open. The menu is very limited. The chefs have native aptitude that is not encouraged or directed, and they move on at the first opportunity of seeing the bright lights. Often the best recipes go with them. The quality of food means it is usually undercooked and the occasional health risk is not unknown in hot weather.

The restaurant management swings from indifference to can't-keep-out-of-the-kitchen.

If this happened at your home, you would dine out.

Sunrise industry in e-commerce and software development will be occuring here but it will snapped up and taken home as doggy bag by an overseas visitor. You will see it in Australia done to perfection, probably by a Kiwi. My advice is get into the kitchen, don't sit out in the back porch. Give me a reason to invest in New Zealand and it will be a poor reason compared to the benefits of investing offshore.

There are three reasons offered to eat at home:

1. It is close at hand. (Think global ,act global?)

2. There is no currency risk. (No, but the risk has already been assumed by investment in a poor currency andNew Zealand assets.)

3. It's tax friendly. The best thing about New Zealand is the absence of a general capital gains tax regime.(So what, when the NZSE40 still struggles to beat the 90 day bill rate after 15 years.)

Investment in Australia is not the answer.

The reasons against investment here apply to Australia but only less so. It is our de facto home but it too has a volatile commodity based economy. Australia rates only the same asset allocation you would keep at home. It's still not the kitchen.Geography is rapidly becoming irrelevent. The best place to invest is in the economy of the 21^st Century; in global business.

Old economy investment principles applied to a new technological world. If your tired of hearing the Internet age compared to the railway revolution of the 1860's then remember Cornelius Vanderbilt who made his fortune in railways. He used old fashioned savvy to buy up the bankrupt railway companies after the initial euphoria led to a general collapse.

What do you think? Is Australia part of the local equity market? Have your say in the DISCUSSION FORUM

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