Retail investors are continuing to be extremely wary of the stock market, although self managed super funds are still exposed: 38 per cent of SMSF assets are in cash or fixed interest, 35 per cent in Australian shares, 18 per cent in property and 8 per cent in international shares. As Deutsche Bank notes, it is the super pool and foreign institutions that are the main source of support for the stock market:
Foreign investors continue to inject new money into Australian equities, though are focused on non-banks. Banks exposure is at record lows. – Superannuation funds have received substantial discretionary inflows on top of mandatory contributions. Quarterly inflows have averaged $27bn over the past 2 years, allowing solid investment in domestic equities. Super funds have shown considerably less interest in foreign securities in the past 6 months. Cash positions remain high and are still being added to, suggesting there is scope for more flows from super funds into asset markets in time. – Households continue to opt for deposits over shares, though bank stocks are of some interest. The household debt/income ratio has been stable for ~6yrs, but accounting for rising deposits suggests a fall in ‘net’ gearing. – Investment funds have withdrawn from equities, as the retail inflows on which they rely have turned to outflows.
There is a big divergence in perception about Australian banks. Foreign institutions do not like them, local institutions love them. This may be in part the difference in tax treatment — franking credits do not apply to foreign institutions — but it may also be an indicator of local complacency, expecially about the health of the Australian property market, and therefore the banks:
Domestic institutions are close to a record overweight in banks, and if markets were to rally there could be a rotation to mining where valuations have fallen. Foreign investors have a large underweight in Australian banks, but may maintain that and instead choose foreign banks given they are considerably cheaper relative to history.
The interesting thing with the Australian super pool is the relative lack of investment into alternatives, which in SMSFs account for about 1-5% (although in industry funds it is closer to 20%). Equities, cash and property seem to be seen as the options. That is not the case internationally. A Towers Watson report makes interesting reading. If there is a shift to alternatives in the Australian context, especially at the retail end, the demand for Australian shares may get even weaker.