Time to ease off on the Northern focus and consider Down Under

Wealth managers and financial planners alike always stress the importance of diversifying a portfolio. On geographical lines, most investors concentrate far too much in the northern hemisphere and particularly in Europe and North America.
Australia, home to the Great Barrier Reef, should also be part of a wide-ranging portfolio.Australia, home to the Great Barrier Reef, should also be part of a wide-ranging portfolio.
Australia, home to the Great Barrier Reef, should also be part of a wide-ranging portfolio.

To balance this position, look at Australia which offers an advanced economy and mature stock market. Its 24 million citizens will be celebrating Australia Day on Tuesday.

This is the anniversary of the 1788 arrival of the first British ships at Port Jackson, New South Wales, and the raising of the British flag by Governor Arthur Phillip.

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The International Monetary Fund says gross domestic product there was 2.4 per cent last year and expects it to jump to 2.9 per cent in 2016. By comparison, the UK has 2.1 per cent GDP. Yet inflation is far higher at 1.8 per cent, rising to 2.6 per cent against just 0.1 per cent in the UK.

The IMF notes that Australia has enjoyed “exceptionally strong income growth for the past two decades but sharp falls in trade has brought this to a halt.”

It expects cyclical recovery to be likely in the near term whilst income growth is predicted to slow in line with other advanced economies over the medium term.

The Reserve Bank of Australia has held the main interest rate at an historic low of two per cent since May 2015 “although further cuts this year are likely to be required to offset continued weakness in commodity markets”, predicts Martin Payne, Leeds-based director of wealth manager Brewin Dolphin.

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The next window for a rate move will be February 2 at the board meeting of the Reserve Bank of Australia but its governor has signalled no change is expected, saying the economy is handling the unwinding of the mining boom “remarkably well.”

British ties with Australia run deep but today its economy and stock market is more deeply linked with China. This reflects not just geographic proximity but the significant mining and commodity position in Australia.

Since the turn of the century, China’s share of Australian exports has risen from four to over 30 per cent.

In turn, the current rapid slowdown in China and corresponding rout in commodity prices have knocked Australia. In Australian stock market terms, commodity companies represent 11.8 per cent of its 481 shares (on its ASX All Ordinaires index), bringing a sterling return of only four per cent over the last five years with dividends reinvested.

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Financial organisations form the major part of its stock market at over 45 per cent. Leading names in Australian banking include Commonwealth Bank of Australia, Westpac Banking, ANZ Banking, National Australia (which owns Yorkshire Bank) and Macquarie Group.

Therefore, the first thoughts of Australia for many – perhaps tourism, farming and wine – are not the largest players on its stock market. A visit three months ago showed that housebuilding and tourism are doing well and offsetting commodity weakness in the economy.

One inexpensive way to obtain a truly representative range of its stocks is to purchase a tracker which seeks to replicate the index.

BlackRock has offered the iShares index of leading stocks, currently 72 holdings, for six years. Stockbroker Redmayne-Bentley charges 1.65 per cent commission but there is no stamp duty as the fund is domiciled in Dublin. The management charge is 0.5 per cent.

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Jason Hollands of brokers Tilney Bestinvest says that to be a buyer of Australian shares, “You would need to believe China’s woes have been overstated and Australia will be a beneficiary of a recovery.”

As an alternative to the above index exchange traded fund, he says the London-listed Lyxor ETF Australia S&P ASK 200 is narrower as it tracks the 200 largest companies.

If looking for an actively managed offshore fund, Hollands tips Baring Australia which is deliberately underweight in mining companies.

If looking to beat rather than track an index, opt for a manager investing with a broad remit. Heather Ferguson, investment analyst at Hargreaves Lansdown, reveals that Jason Pidcock, who she describes as “an exceptional manager”, will shortly launch a new Asian income fund with Jupiter with around 30 per cent invested in Australia.

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Payne is cautious about investing now in the wider market but sees meaningful dividends with potential for dividend growth in such sectors as infrastructure, real estate, financials and certain industrials.

He favours Newton Asian Income which has 37 per cent invested in Australia and offers an attractive five per cent yield.

Telstra, the country’s largest telecommunications and media company, and Amcor, a global packaging firm, are tipped by Payne. Both Melbourne-based, their current yields exceed 4.5 per cent annually with potential for some longer term share growth.

Taking a 10-year view, several investment trusts with distinct Australian holdings have shown fair growth, according to the AIC using Morningstar research:

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Aberdeen Asian Income (15.7 per cent invested) up 123.6 per cent

Asian Total Return from Schroder (8.8 per cent) up 124.2 per cent

Henderson Far East Income (17.9 per cent) up 118.7 per cent

Schroder Oriental Income (20 per cent) up 164.8 per cent

The gloomy outlook for commodities depressed the country’s currency last year but this has made its exporters more competitive on the global stage. This trend is likely to continue as the US has already started its interest rate rise.

AXA Wealth’s Adrian Lowcock prefers to access the region through a diversified Asian fund, such as Schroder Asian Income, which has 18 per cent in Australian stocks. Manager Richard Sennitt is very experienced and runs a concentrated portfolio of 60-80 stocks.

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Bonds rather than equities is the preferred route for Chelsea Financial Services.

“It is one of the few AAA rated countries left in the world and their government bonds are yielding 4-5 per cent,” says its managing director, Darius McDermott.

He likes Man GLG Strategic Bond and Elite-rated Jupiter Strategic Bond.

For directly held Australian Treasury bonds, Nicholas Thomson at Redmayne-Bentley warns of higher dealing costs and exchange rate risk for a non-sterling security. His firm charges £17.50 commission plus £10 settlement and compliance fee with the investment held electronically in a nominee account.

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If saving on a long-term basis with an eye to recovery, a stake in a large mining company could prove rewarding. Payne’s preferred choice is Rio Tinto owing to its diverse range of mining assets and relatively strong balance sheet.

Several Australian firms maintain dual listings which cuts dealing costs. The world’s largest mining company, BHP Billiton, for instance, is the 32nd largest firm quoted in London with a market capitalisation exceeding £15bn.