Index investing is when you buy one investment (index fund) in which you own a tiny piece of hundreds of companies at once. While this provides significant diversification, there is no manager actively – making investment decisions.
Australia’s share market is being pulled in different directions. Some of the biggest companies look expensive, housing-related risks are building, and investors may need to look harder for opportunities. But the person may never have made the video. The platform may not exist. And the promised returns may be nothing more than a way to draw people into a scam. Artificial intelligence (AI) has made convincing content much easier to create. Scammers can now produce deepfake endorsements, realistic-looking news articles, fake testimonials and professional investment websites at scale. That means the old warning signs — poor spelling, awkward wording and amateur design — are no longer enough to rely on.
This may not be a time to simply follow the index. It is appropriate to assess where risks are concentrated – and where stronger companies may still perform well.
The risk investors may be overlooking
A large part of the Australian share market is concentrated in a small number of sectors, including banks. Many are trading at high prices despite modest earnings growth.
That matters because index investors can end up heavily exposed to the same expensive areas. Active investors can choose where to invest – and where to reduce exposure when risks look high.
One key concern right now is the link between banks and property. When house prices rise, households often feel wealthier, supporting spending and borrowing.
When house prices weaken, the reverse can occur, creating pressure for the broader economy and bank earnings.
This is becoming evident through early signs of softness, including weaker interest in new house-and-land packages. Legislated tax changes could also reduce demand from property investors.
How housing can affect spending
When households feel less wealthy, they may delay big purchases such as furniture, renovations or other discretionary items.
That can pressure companies exposed to consumer spending or housing activity.
Early signals from housing developers, retailers and consumer- facing businesses can help reveal where the economy may be slowing before it appears in financial results.
Investors may be better served by paying close attention to businesses at the front end of the housing cycle – such as furniture retailers and house-and-land package developers – because they often see changes in enquiry levels before those trends appear elsewhere.
A market where selectivity matters
The current environment is one where investors may need to be selective. Rather than relying on one big theme, each company should be assessed on its own strengths, risks and valuation.
In a market like this one, investors should consider favouring businesses that may be more defensive, have stronger balance sheets or earn more revenue offshore.
Why active management can help
Active management can be important when the market is concentrated in a few large sectors.
Because banks make up a substantial part of the Australian share market, index investors may have more bank exposure than they may realise.
The key things active managers focus on are the price paid for a company, the risks to its earnings and how well it may hold up in a tougher environment.
What it means for investors
It’s not that investors should avoid the Australian market, instead they should understand where the risks are concentrated.
In a market dominated by banks, miners and passive investment flows, active management can help investors look beyond the biggest names in the index.
The next phase may reward a more selective approach. If property weakness affects banks and consumer spending, stronger balance sheets, resilient earnings and less reliance on the domestic housing cycle may matter most.
Not sure what this means for you? Your financial adviser can help you explore your options.