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Australia's pension fund Cbus Super is reducing its investment in domestic shares, increasing its exposure to global and emerging markets, as concerns grow over the high concentration of the Australian stock market. This makes it the latest major institutional investor to lessen its reliance on local equities.

Why limit to only 10 ASX 200 stocks?

Cbus Super Chief Executive Officer Kristian Fok said the fund has cut its domestic stock portfolio by 1 percentage point. The A$115 billion (US$81 billion) fund now allocates 22.5% to Australian shares in its main portfolio. In contrast, its global equity allocation has risen by 0.5 percentage points to 28.5%, while emerging market stocks have also increased by 0.5 percentage points to 3%.

Fok noted that while the fund remains an "active and committed" participant in the Australian market, the local bourse has "been heavily concentrated for a long time, particularly in a few banks and resources companies." He added that the appeal of emerging markets extends beyond AI-related stocks to sectors like biotechnology. "As our scale grows, we definitely need to allocate assets across a broader portfolio," he said.

The fund's investment team believes emerging markets "offer more opportunities" and are attractively valued. Fok also indicated that a "fair portion" of the capital moving from domestic to global markets has been directed toward the "Magnificent Seven" US tech stocks.

Performance lag and shifting profit outlook

The S&P/ASX 200 Index, heavily reliant on giants like BHP Group Ltd (ASX: BHP) and Commonwealth Bank of Australia (ASX: CBA), has continued to underperform its international peers, even after an AI-driven selloff hit US and Asian markets over the past two months. This volatility may persist, particularly in markets like South Korea, Japan, and Taiwan, which are vulnerable to sentiment shifts due to their dependence on optimism about chipmaker demand.

However, investors may be drawn to stronger earnings prospects outside Australia. While corporate earnings expectations in Australia have stalled over the past three months, forecasts for overseas companies are still being revised upward. The upcoming August earnings season will test these expectations as companies report performance amid high oil prices and market turbulence.

Global stocks offer superior earnings growth

According to research firm Chant West, international stocks have helped deliver returns of about 9.5% for the major balanced investment options in Australia's A$4.4 trillion pension industry, the primary vehicle for most Australians' retirement savings. Currently, roughly half of Australia's total pension assets are invested overseas. Another Australian super fund, Brighter Super, has also recently announced it is reducing its domestic equity allocation in favor of global stocks, citing ongoing US AI investment trends.