Super fund flows into global shares break record

Australian superannuation funds are piling into offshore assets at an unprecedented pace - homegrown capital worth $130 billion flowed into global stock markets in the 2021 financial year.

Westpac senior strategist Robert Rennie said yesterday’s official managed-fund data confirmed that while Australian super assets jumped by more than $450 billion over the year to June 30, 2021, a record share was being invested in global assets.

“In effect, 28¢ in every $1 placed in super went into foreign equity. That takes foreign assets relative to domestic assets to 19.4 per cent, which is the highest on record.“

Mr Rennie, who heads financial market strategy research at Westpac, said the flows were the biggest ever seen, “and have had a material impact in terms of balancing the balance of payments”.

He said the portfolio outflows might well have put a cap on the Australian dollar of late, because Australian asset managers were settling their trades in foreign currencies, by necessity.

The Australian Bureau of Statistics release came a day after the national accounts also revealed momentous flows by super assets into foreign equities, implied in the balance of payments numbers.

Over the financial year, Australia ran a $68 billion current account surplus, compared with an $80 billion deficit five years ago. This, Mr Rennie said, was a “truly staggering and historic shift”.

The Westpac strategist said that for the balance of payments to be in equilibrium, the current account surplus had to be offset by an equally large move in the financial account.

Balancing act

Yet, with a current account, net foreign investment and net portfolio debt all at record highs, the basic balance weakened after peaking in June last year. That suggests an enormous portfolio outflow of about $150 billion, $45 billion of it in the last quarter alone.

While the flow of superannuation into international shares is proceeding at a record pace, Australia’s relative ownership of foreign stocks has exceeded foreign ownership of Australian stocks since 2013.

Over the past decade, Australia’s net equity holdings have surged from minus 5 per cent of GDP to 15 per cent of GDP.

As a result, since early 2018, Australia has received more money in dividends from abroad than it has paid out to foreigners who own Australian equities.

But this has not been enough to eliminate the country’s persistent deficit in its primary income balance, given the large amounts of interest that the government and Australian banks pay to foreign bondholders.

However, this offshore funding requirement has waned because of slower credit growth, increased deposit growth and the Reserve Bank’s move to provide cheap money to banks through its Term Funding Facility.

The ABS data released yesterday was in line with that estimate: overseas superannuation assets increased by 8.1 per cent or $48.8 billion in the final quarter as superannuation assets increased by 5.6 per cent or $177.8 billion to $3.35 trillion.

Superannuation assets account for the bulk of the $4.3 trillion of total managed fund assets as of June 30, 2021. That marked a 5.1 per cent increase over the quarter.

Global equity markets, meanwhile, gained about 7.5 per cent in Australian dollar terms in the final quarter.

The Australian Financial Review has previously documented profound shifts in Australia’s balance of payments, largely as a result of a growing pool of superannuation assets, a greater share of which is being deployed overseas.

Over time, the flow of investment income from the growing pile of superannuation’s foreign assets is expected to be supportive of a higher currency as they offset the distributions paid out to foreign owners. But for the foreseeable future as more funds are shipped offshore, that may weigh on the Australian dollar.

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