Big divergences are occurring between the investment strategies of foreign institutions, domestic institutions and local retail investors. A Deutsche Bank report is showing that local investors seem to like Australian banks, but foreign investors are running away fast. On the other hand, foreign investors and institutional funds were behind most of the raisings as retail investors went for cash. What is interesting is the attitude to banks. Australian retail investors like them — households were net buyers in 2H11, and their overweight positions are at record levels — and foreign buyers are as underweight as they have been in 15 years. Only one group can be right, and I know where my money is:
As is commonly discussed, foreign investors are not generally attracted to Australian bank stocks. The ABS data bear this out, showing minimal buying of banks recently, and instead a focus on other sectors (presumably resources). Foreign investors are in fact now more underweight Australian banks than they have been in almost 15 years. Australian banks represent 23% of the market, but only 12% of foreign investors’ Australian portfolios.
The super funds are flush with inflows, as ever, and households are opting for cash:
The household debt/jncome ratio has been stable for ~6 years (in contrast to the fall in the US), but if we take into account rising deposits household ‘net’ gearing has declined substantially.
␣ Investment funds have withdrawn from equities, as the retail inflows on which they rely have turned to outflows. As with other domestic investors, bank shares are relatively popular.
Interestingly, Deutsche thinks that the high $A has harmed the market through underperformance, rather than because it made Australian shares relatively more expensive to foreign buyers:
It is interesting that foreign inflows have not been weaker given the strength in the AUD, given that it makes local equities relatively more expensive. This suggests that foreign investors have some confidence that the AUD can remain elevated in the near term, and perhaps even rise. Indeed, we think that the movement in the AUD matters more to foreign investors than the level, and the AUD has been stable for a while. Overall, we think the contribution the AUD has made to the protracted downgrade cycle over the past 2 years has been the driver of our underperformance, rather than a lack of interest from foreign investors.
There are intriguing cross currents of sentiment here. Obviously, local investors think that the banks are safe, presumably looking at the franked yield — franking being a big difference affecting the after tax returns for local and foreign investors, of course. Those cold eyed foreign investors are probably saying something rather dark about the prospects of capital gains in the bank sector, though. They are leaving in droves.