A young, educated workforce in Singapore. Rising household income in Brazil. Export growth in China. Technology innovation in San Jose, California.
These are some of the factors driving global growth. And if you’re only investing in Australian companies, you are excluding 98% of the world’s stock market value.1 In the last twenty years, many Australian investors have realised this and have invested around $123 billion in foreign sharemarkets.2
At 2% the Australian market is small compared to the United States (56%), Japan (9%) and the UK (9%) and Canada (4%). The Australia market also offers a narrow range of investment opportunities.
At around $1.5 trillion the Australian Sharemarket is not much larger than some international companies. Indeed the combined size of the five biggest stocks in the World (Apple, Exxon Mobil, Microsoft, and Google) is larger than the entire Australian Sharemarket, with a value of $1.77 trillion.3
Source: World’s largest listed stocks as judged under criteria used to compile the MSCI World ex-Australia Index (with net dividends reinvested) in Australian dollars, company values as at close of trade 13 December 2013 Vs the S&P/ASX 200 index as at 30 November 2013.
The Australian economy and listed equity market are dominated by a few sectors such as the finance sector including Real Estate Investment Trusts (property) which represents 45% of the total market capitalisation, and the mining and energy sectors represent another 23% of the total market capitalisation.
These sectors are heavily represented in the top ten shares listed on the Australian Securities Exchange adding up to around 68% of the total S&P/ASX 300 Index.4 This representation is a significant distortion where on a global basis these sectors combined only represent 34%.5
Simply there are just more opportunities in overseas markets with around 14,000 listed companies to choose from on major overseas stock exchanges outside of Australia. These include some of the world’s fastest growing industries, such as healthcare and biotechnology that are not well represented on the Australian Sharemarket. With the world’s aging population, and biotechnology extending beyond just the field of medicine, many market analysts believe these sectors will continue to grow over the long term.
Increasing integration of financial markets has meant that, although global events such as the Global Financial Crisis have increased the synchronisation of markets, investing in overseas markets can provide a hedge against country-specific risk, thereby providing some protection against volatility as a result of individual countries sharemarket being imperfectly synchronised.
Exchange rates and foreign exchange
If you invest in a foreign sharemarket you are holding overseas assets. When making an investment in foreign markets you are making two decisions
- A decision to invest in a market or stock
- A decision of the relative value of the Australian dollar vs the foreign currency
The value of the foreign stock in Australian dollar terms is affected by changes in the overseas currency relative to the Australian dollar.
For example, a fall in the Australian dollar vs the currency your investment is held in translates into a rise in the value of your investment. A rise in the Australian dollar relative to the currency your investment is held in translates into a decline in the value of your investment.
Currencies are the shock absorbers on the road of economic unevenness and as such, they do not rise and fall at the same time or at the same rate.
Hedge or unhedged
For many a hedge is a thing at the front of the garden, but in global investing, it is an investment strategy used to mitigate the impact of changes in the value of the Australian dollar vs the market in which an investment is made. A decision to hedge a currency exposure is based on a view that the investor either wants to obtain an exposure to the share price movement of a particular market, or they have a view that the Australian dollar is likely to rise in value against the currency in which the investment is made.
Picking currency movements in the short term is fraught with danger and usually wrong, and as investment advisers, we apply a well-worn strategy across our clients’ portfolios.
How much should an investor allocate to global equities?
Mathematical studies suggest that Australian’s should allocate between 40-50% of their share portfolio to global share investments depending on the investment time frame and goals. However, Australian investors, like their global counterparts, are influenced by embedded home country equity biases – resulting from factors such as behavioural tendencies as well as the real financial benefits of dividend imputation.
Exposure to global markets, is an important consideration for all investors as part of their long term investment strategy, the decision on how to invest, in which markets or stocks to invest, whether they exposure should be hedged or unhedged, are all complex decisions that are inter dependent on you specific investment goals.
Shartru Wealth Management can advise you on how to make the foreign share market investments. We can help you come to a conclusion on whether to hedge or not.
1 Steinfort, Rosemary and Alexis Gray, 2012, the role of Australian equities and the impact of the home country equity bias, The Vanguard Group
2 ABS, Balance of Payments and Global Investment Position, Australia, June 2012 as at December 2012
3 As measured by the world MSCI World ex-Australia Index (with net dividends reinvested) in Australian dollars
4 Factset data dated 31 December 2012
5 As measured by the world MSCI World ex-Australia Index (with net dividends reinvested) in Australian dollars