Red flag raised on emerging markets

Emerging markets might be the investment theme du jour, but Australians could find chasing this theme exposes them to unnecessarily higher levels of risk, according to research house Morningstar.

Morningstar investment research manager Tim Murphy said Australian investors risk doubling up on macro risks if too heavily exposed to Australian and emerging markets equities.

Speaking at a Morningstar investment update in Sydney yesterday, Murphy pointed to the high correlation between emerging market investments and Australian equities.

“A good chunk of Australia’s performance has been an emerging markets theme,” Murphy said.

Emerging markets coupled with Australian equities represents a doubling up on the same macro risk factors, making investors susceptible to larger draw downs when the music stops, Murphy said.

As such, Murphy said Australian investors should tread carefully where emerging markets are concerned.

Murphy suggested investing in companies listed in the developed world that trade with emerging markets might be a safer way to earn returns from emerging markets.

More broadly, Murphy said advisers and investors were focusing too heavily on potential returns without taking enough consideration of investment risk.

Morningstar believes Australian equities would marginally outperform international equities over the coming years but that international equities would do so with less volatility, leading to a better experience for investors.

The research house is recommending a bias towards international equities (unhedged) at the expense of Australian equities.