SMALLER investors overwhelmingly prefer financial stocks to other sectors in the market, figures show, in a sign households are trying to cash in on banks' strong profit growth.
According to the latest Reserve Bank Bulletin, households with direct share holdings have 65 per cent of their portfolio in financial stocks, compared with 30 per cent for institutional investors and just 20 per cent for foreigners.
On the other hand, retail investors seem reluctant to embrace the corporate bond market, which the government has made a key priority in an effort to broaden the nation's funding base.
While retail investors hold about 20 per cent of the sharemarket (not including indirect holdings through superannuation funds), households own less than 1 per cent of the corporate bonds on issue.
The RBA report, written by Susan Black and Joshua Kirkwood, said this clear preference for equities was due to the strong cash flows produced by financial stocks, which tend to pay high dividends.
The wave of bank privatisations and demutualisations in the 1990s including AMP, CBA and NRMA also helped drive retail investors towards financial stocks.
As well, complex disclosure requirements for companies seeking to issue retail bonds have caused issuers to favour the corporate bond market. The government this year said it would ease these disclosure rules in an attempt to encourage more households to invest in bonds.
It is not clear whether households have been leaning more towards bank shares in recent years, as this was the first RBA report collating figures on the sectors favoured by retail investors.
However, households' preference for shares is consistent with bank executive comments that Australia has a much stronger share ownership culture than other countries, which presents problems for developing a retail bond market.
The RBA also revealed that foreign investors' share of the Australian sharemarket had increased sharply in recent years. The report said the share of the market owned by foreign investors had surged, to be almost on a par with institutional investors.
"Foreign investor demand increased through 2008, underpinning the large volume of equity raisings undertaken by Australian companies during the financial crisis," it said.
Of the total ASX market capitalisation of about $1300 billion, foreigners own about $550 billion worth of shares, a touch below the $600 million in institutional hands. Households own the remainder.
While households clearly prefer financial stocks, foreign investors had just 20 per cent of their portfolios in the banks, and were heavily weighted towards the resource sector. Domestic institutional investors had 30 per cent allocated to the banks, reflecting the sector's overall weighting in the market.
Frequently Asked Questions about this Article…
Why do retail investors overwhelmingly prefer bank shares and financial stocks?
The RBA report explains retail investors favour financial stocks because they tend to generate strong cash flows and pay high dividends. Historical moves such as bank privatisations and demutualisations in the 1990s (for example AMP, CBA and NRMA) also helped build a strong share-ownership culture that pushes households toward bank shares.
How much of a typical household's direct share portfolio is invested in financial stocks?
According to the Reserve Bank bulletin, households with direct share holdings have about 65% of their portfolio in financial stocks—far higher than institutional investors (around 30%) and foreign investors (about 20%).
How much of the ASX market do foreign investors own and how does that compare to institutions?
The report says the total ASX market capitalisation is roughly $1,300 billion and foreign investors own about $550 billion of that. The RBA notes foreign ownership has surged and is almost on a par with institutional investor holdings.
Are retail investors participating in the corporate bond market?
No — retail investors are largely absent from corporate bonds. While households hold about 20% of the sharemarket directly (excluding superannuation), they own less than 1% of corporate bonds on issue.
Why haven’t more households invested in corporate bonds, and what is the government doing about it?
Complex disclosure requirements for companies issuing retail bonds have discouraged issuers and retail participation. The government has said it will ease some disclosure rules to try to encourage more households to invest in corporate bonds.
Have household preferences for bank shares increased in recent years?
The RBA bulletin was the first report to collate sector-level figures for retail investors, so it’s not clear from this release whether households have been shifting more towards bank shares in recent years.
How do foreign and domestic investors differ in their sector preferences?
The RBA finds foreign investors are heavily weighted toward the resources sector and have only about 20% of their portfolios in banks, whereas domestic institutional investors allocate about 30% to the banking sector. Households, by contrast, are heavily concentrated in financial stocks.
Which historical events pushed everyday investors toward financial stocks like banks?
A wave of privatisations and demutualisations in the 1990s — including companies such as AMP, CBA and NRMA — helped drive retail investors into financial stocks and foster a stronger share-ownership culture in Australia.
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