Financial sector concentration raises passive investing concerns
The Australian share market is moving to its highest concentration towards the financial sector in the last 40 years creating concerns around the limited investment exposure and risks inherent in passive investments tracking the index.
This level of concentration is higher than other developed markets including Canada, the United States and Europe, according to Lazard Asset Management portfolio manager Phil Hofflin, who said the four major Australian banks rank in the top 15 banks in the world by market capitalisation in May of this year.
Hofflin said the Australian market has moved to concentrated positions in the past with technology, media and telecommunications being dominant in 2000, materials and energy in 2008 and financials in 2015.
However he said the large shift to financials, while materials and energy continued to taper off, did create concerns around passive investments and their high exposure to index positions.
"If the banks do drop off we don't think they and the market are prepared for the negatives which we think will follow. Recent news about bad debts and the Reserve Bank keeping rates down while the market rebalances means we have taken an underweight position in them," Hofflin said.
"Instead we have invested in resources which during the boom we felt were priced too high. However that part of the index has now lost two-thirds of its value and we feel offers good cash generation and franking credits."
Hofflin said many larger miners had been repriced since the drop off in the demand for resources from China and that would have a flow on effect, firstly in Western Australia and then in Queensland specifically, with the full impact across the country taking longer to play out.
"The housing market, especially in those states, we think will see the impact first as people who spent up find their cash reserves depleting with house prices unlikely to go up any further."
"While people have priced the impact on the resources sector on the Australian economy we don't think that they have priced it on property and the banks; there are some challenges in these areas."
AUTHOR
Jason Spits
Recommended for you
The investment giant has announced a $18 billion deal to acquire a leading US-based private credit manager, marking its third major alternatives deal this year.
Brad Potter, who has helmed Australian equities at Tyndall Asset Management for the last decade, has announced his retirement from the business.
Yarra Capital Management has received a top rating for its Enhanced Income Fund from research house Lonsec.
Abrdn’s head of global fixed income sees a favourable environment ahead for bond investors, though he cautions a more selective investment approach might be necessary to navigate lingering risks.
