Why it's time to reconsider your exposure to the Big Four banks

The Australian share market has had a great run over the past couple of years, and particularly over the past 12 months, with the ASX 200 Accumulation index up 21% to December 9, 2024.

The international share market has rallied too, led by the US market, with the MSCI World ex Aust Index (AUD) up 32% over this same period.

Trying to predict what will happen over the next 12 months is a guessing game.

What is the outlook for the Australian share market?

However, longer term five-to-10-year forecast returns are far more accurate and importantly help you make decisions on when it is time to be increasing or decreasing exposure to an asset class.

The Australian share market now has a forecast 10-year return of 5.8% per annum.

When we compare this to a risk-free investment, such as a term deposit of 4.6% per annum, which is the forecast for the next 10 years, the premium for investing into a more volatile asset class is not as great as we would like it to be; right now, it is under 2.5% above the term deposit rate, hence we now view Australian shares as being 'fully priced'.

Should you sell your Australian shares?

This is not a recommendation to go out and sell all of your Australian shares.

This is simply to state that we think it could be time to start reducing exposure to Australian shares and move into higher expected return asset classes.

Often share markets will be 'fully priced' and even 'overpriced' when the expected return is less than term deposits. Selling 50% of your Australian shares now could prove a costly decision.

However, starting with a 10% reduction in your Australian shares could be a prudent decision to lessen your risk of a share market correction eroding your wealth.

The best places to look at where to take profits are the shares that have performed best over the past 12 months.

What should you review in your portfolio?

The sector that really stands out from this point of view is the banks, with the Commonwealth Bank and Westpac both up more than 50% over the past 12 months. ANZ and National Australia Bank have also gained well and are up more than 30%.

These are not normal 12-month returns from the banks (and they were not cheap 12 months ago).

However, the banks form a large portion of the Australian share market; the Commonwealth Bank alone accounts for around 11% of the S&P/ASX 200, so index investing is certainly helping to push up bank prices.

Despite little earnings growth, Commonwealth Bank rallied on November 25 to hit a record high of $160, over 50% higher than the year before. If Australia's largest and most expensive bank corrects, the share market as a whole could turn sharply down. That could be a big risk for many Australians' portfolios.

Where should you invest instead?

So, where should people think of investing if they want to take some profits from their Australian shares?

The good news is that fixed interest investments and term deposits are far more attractive now than they have been for the past 10 years, when interest rates went virtually to zero.

As highlighted above term deposits and government bonds at 4.6% and higher yield debt at 6-7% are good returns for less volatile asset classes.

The standout for us is global infrastructure which we expect will be above 8% per annum for the next 10 years.

While these investments are listed on global share markets, the volatility for listed infrastructure companies is far less than regular equities while delivering higher expected returns, as per our forecasts.

While infrastructure can be a difficult asset class in which to invest directly, a managed fund with a diversified portfolio of global infrastructure shares can be an effective way for Australians to invest to grow their wealth as well as reap a reasonable income.

Overall, investors should not get too panicked by the strong run from the Australian share market; it may well continue for some time yet.

Simply to start taking some profits from strongly performing shares in a portfolio and re-investing into other asset classes to which investors are less exposed will improve the diversification and probably returns going forward.

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