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Super funds ramp up offshore equities, raising contagion concerns
Australia’s rapidly expanding superannuation sector is shifting its investment strategy, with fresh data revealing a significant increase in offshore equity allocations.
According to research from Deutsche Bank, super funds have now allocated nearly 50 per cent of their assets to international markets, up 10–15 percentage points over the past decade.
The $4.2 trillion superannuation industry, which represents approximately 150 per cent of Australia’s GDP and is projected to reach 244 per cent of GDP by 2061, has been a key driver of capital flows into global markets.
As domestic equity markets near saturation, funds have increasingly turned offshore.
“We estimate they now own just under a quarter of the ASX, up from 13 per cent in 2005,” said Lachlan Dynan, macro strategist at Deutsche Bank.
“This has prompted them to look for deeper capital pools offshore offering better liquidity and a diversity of investment opportunities.”
On a flow basis, net contributions into offshore listed equities have averaged $5.4 billion per quarter, exceeding combined allocations to cash and fixed income by $0.8 billion.
“At the end of 2024, 57 per cent of assets were in equities, 19 per cent in fixed income, 8 per cent in infrastructure, 8 per cent in cash, and the remainder in property, alternatives, and commodities,” Dynan said.
“This equity allocation is around the top end of global ranks, and often draws questions.”
A key factor behind this aggressive investment allocation is Australia’s relatively young population, as the country’s lower median age compared with global peers supports a higher exposure to equities, Dynan said.
“What’s more, they’ve actually increased their exposure to equities in recent years, which reflects a greater push into international equities. Allocations to infrastructure have also risen, while they’ve been steadily reducing allocations to cash,” he said.
Super funds have also adjusted their hedging strategies.
“Funds have historically hedged only around 20–30 per cent of their offshore equity portfolios,” Dynan said, with recent data suggesting a decline in hedge ratios.
This trend, he said, raises questions about potential currency risk exposure, especially as FX-equities correlations shift.
“Funds’ low hedge ratios on offshore equities could become a focus in the future, especially with some FX-equities correlations weakening recently, and in a broader structural sense we’ve flagged AUD’s longer-term beta to commodities appears to have declined as the US has flipped to net commodity exporter,” Dynan said.
The extent of funds’ presence in domestic markets has caught the attention of regulators recently, who are becoming aware of this potential channel of contagion from global markets to local markets.
“I would suggest that the main risk from their growing allocation offshore, in combination with owning large portions of domestic markets, is an increased risk of contagion from offshore market moves to local markets,” Dynan said in a statement to Super Review.
According to Dynan, as super funds expand their offshore portfolios, their FX hedges are also expected to grow, but in a risk-off scenario, a decline in hedge values could trigger margin calls, posing liquidity risks.
“In order to meet those margin calls super funds will need the liquidity. If that liquidity is not at hand, there’s a risk they need to sell assets to meet that need, and given they own such a large chunk of domestic assets, if they sell those assets this could exacerbate downward pressure from the original global shock,” he said.
Back in November, the Reserve Bank governor said that Australia’s super funds could amplify market stress if forced to liquidate in response to sudden liquidity demands.
“If there are ructions in financial markets and we saw a little bit of this in the UK, it’s a different system there, but if super funds have to, for example, sell some assets to meet margin requirements than that can exasperate the ructions in the market and that might be a financial stability risk,” Michele Bullock said at Senate budget estimates at the time.
AUTHOR
Maja Garaca Djurdjevic
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