The Australian perspective in asset allocation is an important differentiator of our service. We focus on providing forecasts and dynamic tilts for clients looking to realise gains in an Australian dollar base currency and subject to Australian resident taxes.
Australia is a higher yielding market than most other developed economies. The growing population creates inflationary pressure and the RBA has adopted a relatively high target of 2% to 3% inflation compared to other major currencies. Adopting a higher target implies higher cash rates and higher bond yields domestically.
The “carry trade” then creates flows in and out the currency that are sensitive to a combination of interest rates, commodity prices, and global risk appetite. This can serve as a buffer to downside risk in portfolios when market sentiment is negative. Other foreign exposures can be hedged to reduce volatility and, over the longer term, are likely to result in additional yield from FX hedging.
Similarly, the tax imputation system generally encourages companies to adopt higher payout ratios and to fund growth by raising additional capital, when required. A combination of structurally higher interest rates and higher payout ratios implies that a relatively high proportion of investor returns are received as dividend yields.
The Australian share market has a very different sector profile compared to international markets, with high exposure to banks and other financials, as well as commodities. Similarly, corporate bonds are heavily skewed towards the same financials, who also issue bank bills and collect term deposits. Achieving adequate diversification is not always straightforward.
Few other Strategy services that are available on the market take into account the specific characteristics of the Australian market. We expressively include these factors into our returns, volatility and correlation forecasts.