Deutsche Bank equity strategist Tim Baker late last week released an excellent snapshot of the ongoing strength of demand for Australian Equities.
The report is a doozy but here are the key observations:
- Superannuation funds remain important buyers of domestic equities. This can remain the case for some time because: (1) Inflows are strong, averaging $31 billion a quarter over the past year; (2) Cash piles remain high, with 16% of total financial assets sitting in deposits, compared to 11% historically. Super funds have also been substantial buyers of fixed income securities (both domestic and foreign) and foreign equities.
- Foreign investors have continued to buy domestic equities. But the level of buying is not very high given the fall in the Australian dollar, based on the historic negative correlation between the two. Perhaps foreign investors are wary of the two big chunks of the market – resources, due to China slowing, and banks, due to high valuations compared to overseas peers.
- Households continue to build up superannuation balances through a high level of discretionary contributions ($62 billion over the past year). They remain heavily overweight the banks sector, though they haven’t been adding to this in recent quarters. The consumer sentiment survey shows risk appetite holding around post-financial crisis highs. Household deposits remain elevated, suggesting scope for more buying of equities and other assets.
- Bank sector positioning remains quite extreme. Domestic institutions have been buying banks, keeping a fairly large overweight relative to history. Foreign investors continue with a large overweight. While households have gained more banks exposure through self-managed super funds, this has replaced what they used to hold directly (outside of super) leaving the share of banks’ equity held by households no different to history.