International Equities – The New Opportunity for SMSF's?
Traditionally Australian investors have tended to focus on Australian as opposed to international equities for a number of reasons, including limited access, limited knowledge, tax treatment, currency risk and time zone differences. Over the past few years, through increased coverage in the media, improved access via platforms and trading products looking to global markets to help diversify a portfolio has been increasing in popularity.
The Australian equity market accounts for around 2% of the world's total market capitalization at $1.7 trillion. While we tend to invest in what we know and understand, being Australian companies, benchmark indexes the ASX200 (XJO) & All Ordinaries (XAO) are heavily weighted towards both the financial & resource sectors, around 60% of the All Ordinaries – most investors you speak with hold multiple banks, insurers and miners. As we all know markets move in cycles, we only need to look at the resources sector over the past few years to see the impact this can have. The two images below highlight the weighting of the ASX200 & All Ordinaries to different sectors.
Now there is nothing wrong with solely focusing on the Australian market, however those looking for diversification may find local equities provide limited opportunities in specific sectors. For example information technology has a total weight of 1.1% and 1.8% on the XJO & XAO respectively while the image below highlights a 19.50% weighting in the S&P500 index. Australia is not widely known for technology companies, investors can get local exposure through companies such as Recall Holdings (REC) and Hansen Technologies (HSN) however they are limited in their choices and market capitalization are a fraction of global heavy weights Netflix (NFLX), Alphabet (GOOD), Apple (APPL) and Amazon (AMZN).
Another common example is health care, with an aging population this is becoming a more popular investment theme for many Australia. While health care represents 6.9% and 6.8% of Australian indexes, it composes 14.9% of the S&P500 market capitalization providing more opportunities to a diverse range of companies.
By looking to international markets, investors are able to increase the options of companies they are able to invest in, take advantage of different macro-economic trends, and diversify their risk, not only geographically but also politically and across asset classes.
There are many ways investors can now reach global markets, Exchange Traded Funds (ETF's) which are either actively or passively managed provide similar access to an index performance. Investors can gain access to a specific region, i.e. U.S or global exposure through the purchase of one security.
Advancements in broker platforms allowing multi-exchange access i.e. Saxo Capital Markets trading platform allows multi exchange access through equities, CFDs, futures and foreign exchange.
Managed funds – by investing in a locally based Australia fund whose mandate is to investment in global markets, investors can gain access to international equities.
There are many reasons we are beginning to see a shift into global exposure. The increase in sophistication of investors through education and coverage in media, are now familiarizing themselves with different industries and companies globally providing them with confidence to investment in what they understand. Advanced broker platforms that allow investors access to different equity exchanges, foreign exchange, futures and CFDs making the ease of accessing these markets simpler. Increased competition among these providers has also lowered costs over the years, making it more feasible.
Things to consider:
Currency exposure; foreign equities will be based in the country of origins currency, i.e. U.S equities are priced in US dollars. Were the Australian dollar to fall against the US dollar, then profit will be higher and vice versa.
Political and regulatory risk; different markets are subject to different regulations compared with the Australian market. It is not always easy to keep on top of these changes, it's important that you understand the laws relating to specific markets before investing.
Time differences; different markets operate in different hours which may not be practical for some investors, i.e. a trader looking to enter U.S. equities on the open would be waiting until around midnight in Sydney to do so.
Tax implications; in Australia income resulting from overseas investments are treated differently to local income. It is important you speak with your tax advisor to understand these implications on your situation before investing.
Diversification; investors may look to spread around their exposure, allocating portions to different regions as well as developed vs developing markets.