New Zealand investors are starting to look at Australian shares for income and dividends instead of historically looking at Australian companies as providing high growth prospects.
Craigs Investment Partners broker Chris Timms said that after a period of poor performance and falling domestic interest rates, Australian shares were looking "quite attractive" for dividend yields.
In Australia, interest rates had come down aggressively in recent months. This time last year, the Reserve Bank of Australia's cash rate was 4.75% but was now 3.5%.
The yield on a 10-year government bond had fallen from 3.7% three months ago to 2.8%. Six-month deposits had fallen from 5.2% a year ago to 4.3%.
"Judging by the outlook for Australian inflation - currently tracking at just 1.2%, well below the RBA target range of 2% to 3% - and other global concerns, interest rates in Australia could go lower still.
"In fact, markets are pricing in an expectation of the Australian cash rate to be as low as 2.5% in a year's time."
Mr Timms said retail investors had been virtually absent from the sharemarket over the past year, which was not surprising given poor performance in the period.
Instead, they opted for the safety of bank deposits which had served them well with interest rates being relatively high.
Households had added $A17 billion ($NZ22 billion) per quarter to their cash balances in the past nine months. Equity markets had outflows in the period.
Retail investor exposure to cash and deposits remained near a 15-year high while their exposure to shares was at its lowest level since the Australian Bureau of Statistics began collecting data, he said.
As the cash rate fell, the return on deposits began to follow.
Because of that, an investor whose one-year bank deposit rolled over this month would have faced a 25% fall in income upon reinvestment.
At the same time, the dividend yield on Australian shares has increased from 4.3% a year ago to 5.2% last week, well above the 20-year average of 4% and looking more attractive relative to deposit rates than it had for some time, Mr Timms said.
"As we have seen in New Zealand over recent years, income stocks can be significant outperformers as interest rates fall, especially when the realisation sets in they may remain at low levels for some time.
"While it might take time for Australian retail investors to emerge from the safety of bonds and deposits, the risk/return balance is clearly shifting towards shares."
However, there were some positive signs on the horizon for Australian equity investors, he said.
Corporate balance sheets were much stronger than five years ago. The average level of gearing on the ASX200 was a "relatively modest" 23.1% and many companies had net cash on their balance sheets.
While that did not have an impact on earnings or growth expectations, it placed corporate Australia in a more stable position to weather any slowdown compared to five years ago.
In 2007, Australian companies were carrying high levels of debt and during 2008 and 2009 a raft of diluting capital-raisings took place as balance sheets needed to be recapitalised.
Valuations were becoming attractive with the market price/earnings (PE) ratio at 10.7 times, 24% below the 20-year average ratio figure of 14.1.
"The Australian market dividend yield is also well above its long-term average and in the face of rapidly falling deposit rates could start to attract some attention for retail investors."
Australia could continue to suffer from negative sentiment in the short term, particularly as investors watched China's growth trajectory and the impact China faced from a potential euro-zone break-up, Mr Timms warned.
Markets could remain undervalued, especially if sentiment was against them, as was the case now in Australia.
"These positive factors, as well as the balance sheet strength of corporate Australia, should provide some comfort for medium-, and certainly long-term, ASX investors."
