Australian Funds Shift Away from Local Equities Amid Economic Challenges

Major Australian fund managers are significantly cutting their exposure to local equities, opting instead for international markets. This shift is driven by persistent inflation and a steep housing downturn, which are weighing heavily on small-cap stocks. Data from Bell Potter shows that only 23 of the 200 stocks on the S&P/ASX Small Ordinaries Index have risen in value since October 1, highlighting investor caution. Ray David, a portfolio manager at Airlie, confirms this trend, noting his firm is underweight on domestic economy sectors like banks and consumer discretionary, while favoring the US economy.

Airlie is avoiding major Australian supermarkets such as Coles, Woolworths, and Wesfarmers, and is significantly underweight on big banks. David anticipates a tough domestic economic environment but sees potential rebounds in companies like Seek and SGH. He prefers ASX-listed firms with strong US exposure, including BlueScope Steel, Aristocrat, ResMed, and CAR, which operates Carsales.

The underperformance of Australian equities is stark when compared to global markets. The S&P/ASX 200 Index has dropped 0.2% this year, while the S&P 500 has surged 12.6%. Limited local tech exposure contributes to this gap, but domestic factors are more critical. The Reserve Bank of Australia recently raised the official cash rate to 4.6%, the highest since 2011, while annual inflation accelerated to 4% in August, driven by rising petrol and building material costs. Sydney’s median property value has fallen over $112,000 since February, marking the steepest housing downturn in four decades.

Richard Coppleson of Bell Potter warns that investor sentiment will remain poor unless government spending, a key inflation driver, is addressed. The combination of high inflation, rising borrowing costs, and a weak housing market is prompting Australian fund managers to seek safer havens in international equities.