It’s time for investors to look to Asia

Macquarie recognised the importance of Asia years ago. Pic: Bloomberg

Australian investment strategies and portfolio allocations have followed similar patterns for the last decade.

But the current disturbances in the Australian economy are likely to trigger fundamental change.

I suspect we are going to look much more closely at Asian investment than we have in recent times.

In the last 10 or 20 years a locally-based Australian investment strategy has performed well and, of course, at the forefront of that strategy has been the success of banks which now occupy five of the top 10 ASX stocks.

But the outlook for banks – therefore a big portion of the ASX market – is now more unfavourable than it has been so far this century.

On the plus side, Australian banks are well regarded overseas and have no difficulty accessing international loan funds so, unlike the early 1990s, solvency is not an issue.

But in the profit growth stakes, the blows just keep coming.

We saw this week Westpac make big provisions for past adviser error and that is going to spread throughout the banks because, in simple terms, junior bankers took risks in the boom and loaned far more than was prudent, leading customers into high-risk situations while advisers took big commissions. Customers are now demanding and receiving compensation.

This is creating the most incredible nervousness and conservatism among current middle and lower ranking bank staff, who are often petrified of taking loan risks which might then cost them their banking career. They have families and homes themselves and it is that fear plus the chestbeating of ASIC and the regulators that is driving the credit squeeze and so restraining bank profit growth.

At the same time there are a series of taxes planned for banks including the financing of the extra outlays required by the regulators.

Add to that the infamous proposed ALP retirement and pensioner tax levied on cash franking credits, which will further damage banks share prices.

In the process, that will cause investors to look around for local income-producing stocks that don’t use franked dividends, but it will also increase international investment.

Again the tradition for Australians is to invest in the US and Europe with emphasis on the UK. But if you are looking for long-term growth the most exciting area is on our doorstep with two giant countries, China and India, being transformed. We experience the side effects of that increase in affluence via the growth of Chinese and Indian tourism.

Had Australian companies been headed by longer term thinkers over the last decade or two we might now have a lot more companies with major stakes in the region.

The best placed of our local companies to go into Asia were the banks.

But the delights of the housing boom caused our bankers to abandon their Asian ambitions so our banks are much more locally focused than they ever have been on the past.

And while there are a series of international investment houses such as the Platinum Group, they don’t dominate the scene.

But given this looming change in investment allocation we are going to see a lot more innovative Asian investment thrusts.

What brought this home to me was the decision by Alan and Carol Schwartz, who have been very successful local investors, to decide that Asia was where they now needed to focus.

They took the view that there were problems in Australia, Europe and the US so the most exciting longer term arena was not Australia but to our north in Asia.

But to go to Asia required seeking Australian-educated experts who were based in Asia.

Not surprisingly they found them in the so-called ”millionaires factory”, Macquarie, which had come to a similar conclusion years ago.

But there was an opportunity because the Macquarie incentive systems, although generous, are based around the success of Macquarie rather than individual activities.

Alan Schwartz wooed the Macquarie team with equity and incentives linked to the investment performance of their efforts.

And it worked, with Sam Le Cornu, Duke Lo and John Lam joining the Schwartz Stonehorn Asian investment thrust. The initial Stonehorn fund to be launched in a month or so is only for $1 billion and will concentrate on just 30 Asian stocks.

If that Stonehorn fund is successful it will obviously be followed by a much bigger thrust, but the Schwartz strategy will also trigger other groups looking to market Asian securities into the Australian equity market.

Accordingly, over time, our equity allocation profile will become more like other countries. If asset allocation changes take place when people are saving money through their life then repercussions are relatively minor.

But Australia has already built up a major superannuation pool of which a substantial part is now funding retirement.

If assets fall in value as part of asset allocation changes when people are in retirement mode it is far more difficult repair exercise.

I don’t believe the ALP people as they prepare for government (according to the opinion polls) understand the long term effects of the three-pronged blows to the banking community – limited lending, extra taxes and the change in the franking rules

But longer term it’s a good thing if Australians think more about our region in both investment and management strategies.