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Australia bets big on US bear market

  1. Australia bets big on US bear market (Sydney Morning Herald)
    By John Garnaut
    November 11 2002

    Australian investors are being lured to the US like moths to a flame - with fund managers picking the worst bear market in 70 years to send record levels of portfolio investment into the US.

    The latest US Treasury figures show Australian fund managers are pumping superannuation and other funds into US markets even faster than US markets are burning it up.

    In the three months to the end of August, Australian investors poured a net $US6.3 billion ($11.5 billion) into US corporate bonds, equities and Treasury bonds - the highest figure in history.

    While a net $US1.4 billion of this went into US Treasuries, which performed well over the period, most of the flows went into what have so far been disastrous investments in US equities and corporate bonds.

    Australians tipped a net $US1.8 billion into US shares - more than twice as much as in any previous quarter - in a period when the S&P 500 index dropped by 14 per cent to 895 (where it was at Friday's close).

    In the same period, Australians pushed an astonishing net $US2.5 billion into US corporate bonds - three times the highest level previously recorded.
    The US corporate bond foray came at a time when the "spread" - the difference in yields between US Treasuries and investment grade corporate bonds - deteriorated from 195 basis points (1.95 percentage points) to 250 basis points.

    Corporate bonds have not recovered since.

    National Australia Bank strategist Greg McKenna said Australia's appetite for badly performing US assets appeared to be unrivalled.

    "Of the first-world investment market, it does seem we are the only ones that are continuing with gusto to buy US assets. Australians have burnt a lot of cash investing in the US over the past couple of years," he said.

    Privately, some fund managers and equity strategists blamed the accelerating push into US markets on the "tyranny" of asset consultants, who they say are pushing managers to increase exposure to foreign assets but denying them the flexibility to deviate from weighting indices.

    The American corporate bond market is a novel experiment for Australian fund managers, as they rotate out of equities in search of higher yields.

    Brad Scott, Salomon Smith Barney's head of fixed income research, said the widening in spreads implied capital losses for investors. "Post WorldCom, spreads blew out across the board and investors have been burnt severely," he said.

    Economists are concerned that America's dependency on foreign capital is unsustainable.

    In the year to August 31, the US received a total of $US482 billion in net portfolio investment inflows (which excludes foreign direct investment) - of which only $65 billion went into equities and the rest financed government and corporate debt.

    Harvinder Kalirai, State Street's Boston-based economist, said the "deteriorating quality" of US capital inflows would trigger a major US dollar adjustment. "When the dollar falls it's going to be very rapid," he warned.

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