This article from Investordaily outlines the importance of diversifying in international investments to limit the risk of Australia's dependency on China

Global diversification crucial amid local risks

Australian dependency on China causes concerns

By Vishal Teckchandani
Mon 25 Oct 2010

Diversification remains a key driver for international equity allocations, experts say.

Diversification and a greater opportunity set are still key reasons for financial advisers to invest clients' money in international equities, investment experts have said.

"Our economy is pretty much reliant on one pillar of growth, which is China, and while this is providing attractive opportunities for growth in sectors such as materials, other sectors are finding the going a little tougher," Zurich Investments senior investment specialist Patrick Noble said.

"We think there are very strong companies with compelling valuations overseas, but would encourage investors not to chase the performance of companies with weaker balance sheets when the market is going through a period of 'risk on'."

Noble said the types of companies Zurich liked were those that would not be heavily impacted by prevailing economic conditions.

"A large number of these companies are sitting on huge amounts of cash on their balance sheets and it's one of the opportunities that we feel has been discounted by investors," he said.

Suncorp Life head of research Michael Furey also favoured global equities.

"While there is a belief that our economy is stronger than the major developed economies, there is a fairly weak correlation between economic strength and stockmarket strength unless prices are very low, which they are not," Furey said.

"My personal opinion is that I'm probably more inclined to favour global equities over Australian equities. I think there is a greater opportunity set offshore and therefore more diversification to reduce portfolio risk.

"And from a downside risk perspective there is probably greater downside risk in the Australian sharemarket than there is in the combined global sharemarket because of the heavy weightings of banks and material companies."

Financials made up nearly 40 per cent of the S&P/ASX 200 Index, while materials companies were worth 25.5 per cent.

Furey said local banks were exposed to significant risk if Australia did indeed have a housing bubble and that bubble burst.

The resources industry also faced downside risk if China slowed down, he said.

"They have an absolutely booming economy, but there is lots of talk around China slowing the rate of growth and that could have a significant impact for our resources exports because of the expected growth that is already factored into prices," he said.

Research house Standard & Poor's (S&P) director of wealth management Jeff Mitchell was also concerned about Australia's dependence on China.

"For equities, Australian investors and portfolio construction has generally favoured a larger Australian exposure rather than international equities," Mitchell said.

"In our view, while the outlook for the materials-dominated Australian market remains buoyant due to the demand for resources being fuelled by the ongoing industrialisation of China and other emerging economies, the risks to the Australian market and economy are high.

"Therefore, we are comfortable to see an increase in the global equities exposure in portfolios to diversify Australian-based equity portfolios to this potential risk."