Khiem Do, who has managed this fund since the first quarter of 1999, lived and worked in Australia for a long time and has in-depth knowledge of the Australian economy and its stockmarket.
Australia has had a fantastic economic boom and over the last five years property prices have risen substantially. This has been an excellent environment for the Australian banking sector but Mr Do is worried that the market has not fully taken into account the risks of falling property prices and what this would mean for the banking sector. Resources and banks are the main drivers of the Australian stockmarket and the Baring Australia fund has taken a long-term strategic decision to have a bias towards resources over banks. This might pay off should property prices start to fall.
With mostly mature companies that do not need to reinvest all of their cash back into their operations Australia is a mature market. It has an overall high dividend yield, currently at some 4% according to Mr Do. Another explanation of the high dividends is that Australian-domiciled investors investing in Australian companies that pay full tax are allowed a tax rebate on the dividends they receive.
Not only is the Australian market seen as a safe haven in the Pacific region in times of unrest and uncertainty but it also offers opportunities at the currency level. The Australian dollar is seen as a good investment should the American dollar continue to weaken.
According to the manager the biggest current risk to investments in Australia would be a global recession as this would hurt the resource-dependent economy. The current accounts would worsen, interest rates would rise and the Australian dollar would fall. Of course another risk is a correction in property prices, which could hurt the banking sector. This would not be as severe for this fund as it has taken this scenario into account and has an underweight position in banks.
This fund is one of few in Europe offering investors a concentrated investment in the Australian stockmarket. For most European investors though it would probably play only a smaller part in a well diversified portfolio.
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