A bias towards investing in local shares and property is common and understandable. Unfortunately for many Australian investors this means missing out on the potential rewards of international investments – healthy returns and risk reduction through diversification of their investments across asset classes.
Each asset class usually exhibits different risk and returns to various market cycles and events. In turn this leads to a lower overall risk of an investment portfolio.
International investment options are broader and more diverse than those available in Australia. Investors have the opportunity to invest in international fixed interest, international equities, global property and alternative assets. The investment choices are innumerable and can be region, country, asset class or sector specific. Below are a sample of returns for the last three years to 30 June 2015:
- The German Market – 52.69%
- The US Market – 62.87%
- China – 134.72%*.
- Global Fixed Income – 6.41%
- Global Property Index – 18.23%^.
Compare these returns to the Australian share market of 11.49% over the same period or the current cash rate at a record low of 2.0%.
The Case for International Equities
While Australian stocks are attractive due to high dividends, made even more appealing by franking credits, this should not be a reason to disregard international equities. A focus on international companies which generate income are likely to result in dividend growth in the long-run. A strategy of capital growth from global equities can also play a crucial role in an investment portfolio. Despite economic challenges faced by Europe and the US, a number of companies and regions remain well-positioned for sound returns. Where large high-quality companies have healthy balance sheets, cash-flows and projected growth, it is likely that earnings and dividend growth will continue.
Australia’s relatively narrow economy offers limited exposure to global trends which will categorise the future, such as a rising middle class in emerging markets, ageing demographics, energy needs and technology innovation. The stocks likely to benefit from these trends are industry-leading corporations with global reach, consider some companies that we are familiar with; Apple, Amazon, Novartis, China Life, Exonn Mobil and Royal Dutch Shell for example.
In terms of risk, Australia’s economy is dominated by mining companies and banks. Financials (including the big 4 banks) and Materials comprise over 60% of the ASX 200 index. When these two sectors under-perform, an Australian share portfolio is likely to have poor returns. For an Australian investor wisely wanting to diversify and include other industries, the choice of ASX ‘large-cap” companies is very small. Only 3 of the 100 largest companies globally are based in Australia, 53 are listed in the US, 15 in Europe and 11 in China**.
Currency Exposure Can Also Provide Diversification
Investing in assets which are bought and sold in another currency can also add diversification to an investment portfolio. Historically when economic growth expectations have fallen, assets like shares and property and the Australian dollar have typically fallen in value. There is currently a concerted effort by the Reserve Bank to lower the Australian dollar. For an investor holding unhedged or partially hedged investments in international markets the value of their underlying investments may change but a fall in the Australian dollar will add to any gains or offset any losses. Of course, the reverse is also true, when the Australian dollar appreciates international investments tend to under-perform.
How Can I Access International Markets?
International investments can be accessed via a wide range of managed funds and exchange traded products (ETPs). These provide are a very efficient and convenient way for investors to build up and maintain their international exposure across all asset classes. Alternatively, you can invest directly through a broker, though you will need to be extremely well-informed to choose wisely.
In my view this discussion should circle back to the principles of sound financial planning; understanding clients’ investment objectives, risk tolerance and time horizon. Then, asking the most important question – is the long-term mix of assets appropriate? If you’d like to discuss, I look forward to hearing from you.
*Source: S&P Dow Jones Indices, ^ Period to 31 May 2015, **Source: PWC. This article has been prepared for the general information of clients and contacts of Edney Ryan Wealth Management and its affiliated disciplines. It is not intended to be relied upon in substitution for advice from a certified financial planner. Readers should seek professional advice having regard to their specific circumstances prior to acting upon anything contained in this publication. Kate is an Authorised Representative of Hillross Financial Services Limited (AR Number 1007833).