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European investors migrate to Australia

European investors migrate to Australia

Birds, mammals, fish, reptiles and investors all have one thing in common – their proclivity to migrate in the winter. Just as the resources present on earth fluctuate between regions and seasons, bond yields too can change in cycles. It’s only natural that investors will migrate to where the environment is more conducive to income.

It’s been a long winter for Europe’s bond market, roughly six years in fact, and the European fixed income environment has become increasingly less fruitful as deflationary fears; a possible Grexit and quantitative easing influences have pushed bond yields in Europe to all-time lows.

In these yield-starved surroundings, European investors are migrating south. There has been an explosion in demand for Australian debt since the 2011 crisis, and this trend is continuing. The European share of total foreign investment in Australia between 2011 and 2014 increased almost 10%.

Foreign holdings of Australian debt securities

Source:Australian Bureau of Statistics, May 2015

The same cannot be said, however, for equities. Figures released from the Reserve Bank of Australia show that, after a strong build up over 2012 and 2013, European investors actually divested roughly AUD 30 billion between 2013 and 2014.

Foreign holdings of Australian equity securities

Source: Australian Bureau of Statistics, May 2015

It can be argued that the rapid surge in foreign direct investing from Europe into Australian bonds is negative due to the ensuing capital flight risk (no pun intended). However, Australia possesses many mitigants to flight risk that being a developed nation allows. Its governance and economy are transparent and its bond market is as liquid as any other advanced economy.

More importantly, the structural shifts in global investor preferences have meant an increase in long-term asset allocation weights to Australia – which is unlikely to reverse any time soon. Central bank reserve diversification is one of those longer term trends, rather than a short-term cyclical flow.

Foreign investment in Australia

Source: Australian Bureau of Statistics, May 2015

It is inevitable that when starved of yield in their domestic climate, the more adventurous investors will travel afar in search of yield pick-up.

Europe’s bond market is not uninhabitable. There is yield to be found when being selective in the marketplace. However, it is inevitable that when starved of yield in their domestic climate, the more adventurous investors will travel afar in search of yield pick-up – especially when this doesn’t mean compromising on credit quality!