Australia continues to provide a defensive play for investors in the Far East, although it is starti...
Australia continues to provide a defensive play for investors in the Far East, although it is starting to look overdone.
Within Asia, the Australian market's relatively low volatility, western-style transparency standards and high proportion of anti-cyclical stocks makes it an important defensive play.
However, market watchers say Antipodean equities are close to fully priced and better value can now be found elsewhere in the Pacific.
Aberdeen Asset Management's head of global strategy Michael Karagianis said: 'When investors get nervous about global growth they retreat to safe-haven buys, and within the Asia-Pacific Australia is perceived that way because it has a much larger financial component to its stock market.
'It tends to perform relatively well in a deteriorating market environment.'
He says this opposition made Australian equities one of the best bets in the Asia-Pacific region in late 2000, as Asian markets, more heavily loaded with manufacturing and IT stocks, headed south.
Australia's mandatory pension scheme, which sees employers contribute an amount equivalent to 10% of salary, also guarantees a steady flow of cash into equities, further damping downside volatility.
But having held up relatively well against the influence of the economic slowdown, Australian stocks are now believed to have less upside potential once the recovery really starts to roll.
'Australia looks cheap, but the problem is a lot of other markets are looking exceptionally cheap.
'So when markets turn around it wouldn't be surprising if it bounced back less strongly,' said Hendersons' director of research strategy Rupert Carnegie.
Hendersons' Asia-Pacific regional funds are currently neutrally positioned on Australia and are looking to increase their weighting in other parts of the Pacific.
Karagianis says the relatively high price of Australian equities has led Aberdeen's Asian funds to take an underweight stance in Australia.
'We see better value in Asia ex-Australia because on a valuation basis many of those markets are significantly cheaper,' he adds.
One sector of the Australian market that could benefit from an improving global economy is resources.
'Depending on your view on the global outlook, the resource sector is relatively well positioned, there's still a little bit of value left there, as well as in some of the insurance sector. It's very stock-specific though,' says Karagianis.
Stephen Swift, manager of Close Finsbury's Far East fund, says further turmoil in the world economy could boost gold stocks, of which Australia as the world's third-largest producer of the metal, has plenty.
'People are using gold as a barometer of confidence in the global financial system. If there was to be further downward pressure on the global economy and a real concern about financial assets then gold might benefit and so bullion stocks will remain under close watch,' Swift notes.
Australia is defensive.
Resource companies well placed.
Low volatility in Australian market.