Investment aversion will cost us dearly

The reticence to invest in the region has created a curious disjuncture between where Australians trade abroad and where they invest.

Our four biggest export markets - China, Japan, South Korea and India - accounted for nearly 54 per cent of all our exports last year but only about 8.5 per cent of Australian investments abroad. Two countries much further away - the US and Britain - accounted for 51 per of Australian investments abroad in 2010 even though they purchased just 9.5 per cent of Australia's exports. Canada, Germany, France and the Netherlands are all among the top 10 destinations for Australian investment even though their importance as trading partners is dwindling.

Australia's investment in the group of "ASEAN 10" nations was just 11 per cent of that invested in the "EU 27" at the end of last year.

Australia's lack of enthusiasm for investment in Asia's emerging markets is costing money, new research shows. An HSBC survey of 4400 high wealth individuals across Asia showed Australian respondents were lagging behind their regional peers in wealth generation.

Australians were the third lowest across Asia in wealth generation in the past 12 months with 56 per cent increasing total net worth compared with the regional average of 61 per cent. Graham Heunis, HSBC's head of retail banking and wealth management, put this sluggish performance down to the narrow investment portfolios favoured here. The majority of Australian respondents had a surprisingly large amount invested in local stocks despite the ASX 200's underperformance relative to other indices in the region since its 2008 low point. In that period, the ASX 200 increased 36 per cent in comparison to the MSCI Asia - a measure of Asian markets - which increased 114 per cent, HSBC said. The survey found 77 per cent of Australian respondents did not have plans to invest in regional or global market funds or equities.

"Australia's affluent are missing out on international wealth opportunities, specifically in Asia and emerging markets," Heunis says. "Emerging markets produced nearly 80 per cent of global growth, yet Australians are not capitalising on this growth engine."

And it's probably not only the wealthy investors polled by HSBC who are missing out.

The national reticence to invest in fast-growing Asian economies is almost certainly affecting small investors and all those with superannuation as well.

"The irony is that our economy is intrinsically linked to Asia, especially China, yet as investors we are not prepared ourselves to bet on places like China by investing there," Heunis says.

So if Australia is so dependent economically on Asia why don't we invest more there?

The head of the Lowy Institute and Asia expert Michael Wesley says the answer lies in the differences between trade and investment.

Trade is a relationship that lasts only as long as each transaction and does not require a lot from either party. Investment, however, is a much more enduring relationship that requires a high level of trust and understanding.

"Australian investment trends go towards countries with which we are much more culturally comfortable and trusting of their governance arrangements," Wesley says.

The patterns of trade and investment "tell us a whole lot" about the depth of Australia's engagement with Asia, he says.

Trends in the global economy could help drive change in the patterns of Australia's investments.

In the past, investment in North America and Europe may have delivered acceptable, safe returns to Australian investors. But the North Atlantic's economic problems means many investments there could deliver relatively poor returns for an extended period.

Some long-range forecasts predict emerging country sharemarkets will contribute twice as much as developed country markets to overall global growth between now and 2050.

Even if that's only half right, Australia's apparent reluctance to invest in Asia will prove very costly.