Why The Dollar Is Behind Foreign Money Pulling Out

Tuesday, September 22, 2015


The tanking dollar may be good news for the economy, but you might forgive Aussie shareholders for not breaking out the bubbly.

For months foreigners have been aggressively selling down their exposure to our stockmarket – and to the big banks in particular. It's a trend that has accelerated over the past few weeks and the continued downward momentum in our currency is much to blame.

Yes, I know it's not an especially deep insight to say that falling prices are due to selling. But understanding who has been selling and why is useful information, particularly when you're trying to figure out whether you should be buying into the dips, holding off for deeper falls or simply getting the hell out.

Global investors own around 45 per cent of our equity market, on ABS data, and the impact of offshore institutions pulling away from Australia is an underappreciated and underreported aspect of the ASX's recent correction. In the deluge of information it's hard for investors to know what to focus on. But cutting through the noise, the selldown by international investors is the big thing to watch.

As head of equity sales in Sydney at Citi, Scott Harris has a rare overview into the movement of institutional money in and out of the local sharemarket. Harris agrees that large offshore investors are playing a significant role in the poor performance of stocks in recent weeks and months.

"In the last two weeks our offshore flows data is the heaviest it's been all year," he says. "And most specifically, the bank flow is the weakest we've seen all year, in as much as it's been the most heavily skewed to selling from offshore."

First, some context: an overseas investor reporting in US dollars has seen the market value of their exposure to the ASX 200 drop by a third over the past year – that's triple the loss incurred by locals like me and you. The difference, of course, is the Aussie dollar, which over that period has dropped from over US90¢ to US70¢.

"Historically foreign investors have looked for stability in the Australian dollar," Scott says. "They are far more comfortable with the level of the dollar now but they'll look for more stability in it."

The selling in the local market was just part of a global story.

Over the week to August 26, which included China's "Black Monday" and the worst day on the local exchange since the GFC, investors globally pulled close to $US30 billion ($43 billion) from equity funds: the largest single weekly outflow on record, according to Citi research.

It's no wonder that Australia, as the developed world's most leveraged economy to China's economic slowdown, has been hard hit.

So what is a local investor to make of all this? Well, so far, it looks like we've been buying.

Arnie Selvarajah is the boss of online broker Bell Direct. He reckons the recent market volatility has "woken up" his retail investor customer base.

Bell Direct had three "record days" from Friday, August 21, with each day bigger than the day before, Selvarajah says, with the ratio of buying to selling "two and a half to one". Normally that ratio is "fairly balanced".

So as foreign institutions have been selling, Aussies have been happy to buy. That may help explain why our market has see-sawed between losses and gains, as buying from locals – including, presumably, the professionals, based on a slew of articles describing them as shrewdly "snapping up bargains" – is offset by what may have been the even greater weight of offshore selling.

So where to from here?

If offshore heavy hitters are a material driver of the ASX's weakness, then recent talk of the currency trading into the 50s is a poor sign indeed. Predicting how low the dollar will go is a fraught business, but be prepared for lower. And if that sparks more flight of capital overseas, then don't do all your dough now; we could see more price falls.

That said, global funds were underweight in Australia coming into the year, and are even more so now. But there may be a lower bound for how far portfolio managers are prepared to move away from their benchmarks. Citi's Harris estimates offshore investors' funds having around 16 per cent of their money in Australia at the start of 2015, against a 23 per cent weighting for the benchmark MSCI Asia ex-Japan index.

The other reason for hope is that Australia remains, and is likely to remain for the foreseeable future, a high-yield market in a low-yield world. At some stage global investors will have to recognise that what at first looks an Asian regional problem is, in fact, a global one, and that the sharp slowdown in China's economy has had knock-ons to the rest of the world.

We've already seen the US Fed wondering whether it should delay raising rates, despite the American economy firmly on a recovery path. This week a member of the Bank of Japan said the country looks increasingly unlikely to hit the bank's two-year inflation target, which means its quantitative easing program looks set to roll on indefinitely. ECB boss Mario Draghi on Thursday night unveiled a revamp of quantitative easing and signalled officials might expand stimulus. The IMF warned this weekend's meeting of the G20 finance ministers in Turkey that China's problems had a high risk of dragging on global GDP growth.

Against that background, our sharemarket's 5 per cent net dividend yield – by far the highest in the developed world, and from a AAA-rated economy to boot – may start looking better and better to international investors.

Of course there are risks – China being the biggest. And there will be volatility, particularly as the "will they? won't they?" debate around the Fed staggers on.

But if a foreign investor, worried about the currency, wants to sell us shares in a big bank or Telstra with an attached gross dividend yield of 8 per cent or above, well … it's hard to say no. 
- Patrick Cummins - AFR

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