His comments follow S&P's decision last week to put Australia's AAA credit rating on downgrade watch over doubts that the newly elected Coalition government will be able rein in the country's widening fiscal deficit. The agency also revised down the outlook on the AA- ratings on Australia's main four lenders, from "stable" to "negative". Although the banks' current ratings were all reaffirmed, the negative outlook has raised concerns over their future borrowing rates. However, many analysts say lenders' wholesale funding costs in global bond markets were unlikely to rise even if Australia were downgraded a notch. "The market has in the past shown a willingness to overlook technical downgrades where, as in this case, there has been no deterioration of the underlying credit," said Nikko Asset Management portfolio manager Chris Rands on Tuesday.

"So, while the probability of a downgrade has increased, we do not expect a significant change to the banks' ability to access funding or the cost of that funding," he said. Mr Shah's comments on property risk, however, add to a chorus by global economists, fund managers and other forecasters who warn that pockets of Australia's housing market, particularly in Sydney, are overvalued, and that households are over-indebted. Others have warned that subsequent apartment oversupply in some cities could erode prices and leave highly leveraged borrowers with negative equity. The economic slowdown in China, along with a crackdown on foreign investors, could also undermine the residential property market, they say. "Relative to other parts of the globe, we've been more cautious on Australian bank risk, particularly giving the reliance of Australian banks on foreign funding," Mr Shah said.

"And I think that the broader economic health of Australia has been challenged a little bit by what's going on with the economic rebalancing and deceleration in China." House price inflation in Sydney, and other asset bubbles, were as much about extreme monetary easing by central banks worldwide as it was about local conditions, he said. The fact that currency markets had absorbed a lot of market global volatility over recent years showed that capital moved quickly. "Capital is definitely globalised, and part of that is that there are not enough returns, so you're willing to actually travel to find it," Mr Shah said. "The flip side of this is that, apart from countries such as Australia and New Zealand, most developed countries have negative real rates.

"That's a real challenge for investors: you can take risk and bear additional volatility or you cannot take risk and watch your dollars reduce in value on a real basis. He said Britain's shock vote to leave the European Union and Donald Trump's candidacy in the US presidential election were partly symptoms of people's frustration with slow-moving economies and dislocation. "What keeps me awake at night is that you have an underlying force on the global economy where it's not growing very quickly and you have a lot of really disappointed people," Mr Shah said. "That is going to lead to political volatility and regime changes. "So as much as the market is currently pricing in quantitative easing forever, and assets are benefiting from that, we have to ask where that political change will happen next and how that could really change how we value companies' equities and debt, and other assets."