Foreign funds flock to Australia

The Australian market has seen an increase in capital inflows, as global investors searched for yield amid the low interest rate environment, according to Instreet Investments.

Instreet Investments' managing director, George Lucas, said with the amount of debt in negative yields at $13 trillion, it was no wonder investors turned to equity for yield.

"Thanks to years of continued investors activism, top Australian companies paid higher dividends and that helped to produce one of the highest yielding countries in the world.

"Compared to the S&P 500, which yields about 2.3 per cent, the yield from ASX 200 companies is attractive, resulting in foreign inflows and leading Australian companies being included in global yield ETFs listed in the US.

"It's not just equity yield that is attractive in Australia. The AAA rated government bonds are producing significant yield when compared to negative yields," Lucas said.

Foreign inflows had a positive effect on the Australian dollar, which was one on the rise despite the RBA cutting rates to record lows. As mortgage lenders were also not passing on the full rate cut to borrowers, the RBA's August rate cut was a completely waste, he said.

"If it is a weakening in the dollar the RBA are interested in, then they may think twice about cutting again."

Over in Japan there was further weakening and that should send a flow of yen into Australia as investors searched for yield. In addition to that, the Japanese equity market was at risk of becoming overvalued, as the Bank of Japan was going to buy more equity-linked ETFs, Lucas said.