Australian investors have embraced global diversification in recent years as a means of accessing trends in technology and medicine, diversifying portfolio risk and achieving better returns.
Trending towards global
At Citi, we see our clients at the forefront of this trend towards global investments. This is driven both as a result of concerns about lower rental yields and lower deposit rates domestically, and a desire to access higher returns from growth sectors that are only available in a limited way locally.
This is an interesting shift, given that 10 years ago it wouldn’t be unusual to see an investment portfolio entirely focused on domestic exposures. Just two years ago our investment clients were splitting their assets at a ratio of 36 per cent international and 64 per cent domestic. Today, this trend has reversed, with portfolios averaging out at 61 per cent international and 39 per cent domestic investments.
The increased demand for global investment opportunities has raised awareness of the shortfall in the Australian banking system for handling offshore transactions. Australians are avid travellers and now also, investors, across the globe. The annual growth of the foreign exchange market in Australia from 2012-2017 was 5.7 per cent, outpacing domestic GDP numbers.
Despite this, the banking industry has responded slowly to the rapid increase in foreign exchange transactions, which is evidenced by the $1 billion in foreign transaction fees Australians paid in 2017.
Cash management
To most effectively tap into these global opportunities, investors need to ensure they have a flexible, efficient and cost-effective cash management account that can transact in a variety of major currencies.
The desire to access opportunities beyond Australia’s investment universe is also clearly evident. Since 2016 the percentage of clients holding international tech investments has grown from two per cent to 22 per cent, while the number holding big four bank investments has fallen from 79 per cent to 31 per cent.
All this diversification has meant a rapid rise in the number of foreign exchange transactions. At Citi, the number of transactions in April alone was up 50 per cent on the previous year. Add international travel into the mix, and Australia now ranks 10th highest in the world for transferring funds offshore.
From an investment perspective there are many benefits of adding currency to a portfolio. Currency exposures have a low correlation to traditional asset classes, offer around-the-clock execution and provide easy access to emerging market exposure.
At Citi we see the trend towards diversifying into global markets as positive, particularly as Australia faces several challenges to generating returns this year. These headwinds include a troubled housing market, an equity market lagging behind offshore exchanges, low cash rate and a bond market that looks more attractive in Europe and emerging markets.
Admittedly, in the past managing offshore investments was not always easy. However, there are now many options available to manage international portfolios, and the ability to gain exposure to global trends in technology and areas like medical research has been greatly enhanced.
David Zammit is Citi’s head of banking and wealth management distribution.
