One aspect of the Australian investment landscape has become readily apparent in 2017: Australian stocks have stalled.
And according to Citi analysts Tony Brennan and Mark Tomlins, part of that has to do with reduced inflows from US investors.
Citi also said Australian investors placed a higher amount of money in superannuation funds this year before tax concessions expired on July 1, and most of that was in cash deposits.
At its current level below 5,700, the ASX200 is below where it started the year. Unlike US stocks which climbed to a new record high overnight, the local index remains stuck at around the same level it was 2014, still well below the record high of 6,800 reached in 2007.
The lacklustre performance of the local market is clearly illustrated in this chart from Citi, which shows how the MSCI world index has leapfrogged Australian stocks:
“Diminished sentiment towards the market seems to have manifested in a combination of weak performance, slight de-rating, lower inflows and reduced equity raisings, all evident this year, after larger flows in recent years, including the banks’ 2015 raisings,” the analysts said.
Brennan and Tomlins said the positive global growth backdrop this year had made other markets more attractive to international investors. They focused on capital flows from the US and Japan, as they are “the two countries that publish sufficient detail on foreign investment”.
The figures show that US investment has decreased while Japanese investor flows have held steady:
“The flows from the US are larger and tend to vary more, and so may have more impact on the Australian market,” the analysts said.
They added that although US investors have reduced their exposure to Australian stocks, they’ve actually increased their allocation towards foreign equities in general due to a favourable global growth backdrop.
“Perceived sovereign risk in Australia after the bank levy and energy market intervention may also have put investors off,” they said.
On the domestic front, Brennan and Tomlins said that with tax concessions expiring in July, superannuation contributions in the June quarter spiked to their highest level since 2007.
“The initial estimates from APRA suggest that industry funds picked up the largest share of the accelerated contributions, but details for self-managed super funds are unlikely to be available until tax returns have been lodged, and should show the largest increases,” the pair said.
Most of the initial contributions would have gone into cash, however Citi expects a reasonable proportion to eventually be invested in local equities, given “the large weighting to Australian equities of both professionally and self-managed funds”.
They also added that sentiment towards housing as an investment in Australian is starting to cool, which may make superannuation and shares a more attractive proposition for local investors.
This chart shows the reduced inflows from both foreign investors and super funds in recent quarters.