The ASX 200 is back at six year highs and is now up 80% from its 2009 low.
This is great news for the mainstream Australian investor who holds the bulk of their investments in the Australian stock market.
But don’t be too quick to celebrate — in that same time investing in the US market would have returned you more than 180%.
Of course, it’s impossible to say before the fact which of the two markets will give you the better return. But wouldn’t it have been nice to have some of your money invested in the US stock market to get a share of those higher gains?
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And it’s not just the US. There are tremendous opportunities throughout the world. Consider the longer term opportunities in China, India, and other emerging market economies. Or in Europe, which is now — finally — showing signs of growth.
Yet despite these opportunities, the average self-managed super fund holds 40% of its investments in Australian shares, and only 11% in international shares.
With the Australian stock market representing less than 2% of world markets, there are a world of opportunities you’re missing out on. But most Australian investors have been very slow to shake their home bias and invest overseas.
Consider that the amount of savings in the superannuation system is now larger than Australia’s economy. These savings are crowding a relatively small local investment space, so investment opportunities are limited.
I won’t speculate on the future performance of the ASX. No one knows for sure where that’s headed. But investing abroad provides you with important diversification.
Opportunities within Australia are especially limited by the type of companies available. By only investing locally you are missing out on markets that aren’t well developed in Australia — areas like technology, pharmaceuticals, engineering, software, aerospace, and the big oil companies.
These limited opportunities are reflected in the ASX 200 Index. The largest five stocks in the index are the four big banks and BHP — making up 38% of the Index! This means that if you hold an ASX Index fund, 38% of your return is dependent on just five companies.
Movements in the Australian dollar offer opportunities too. While the dollar is down against the US dollar since 2011, at 93 cents currently, it remains well above its long term average of 75 cents. And it’s high against a number of other currencies too. This can be great news for you. You can buy more shares for each dollar spent and you stand to gain if the Aussie dollar falls.
Record low interest rates offer another reason to look abroad. If you try to diversify your investments outside of the ASX, the alternatives such as term deposits and bonds offer very poor returns.
In addition, there are concerns as to whether the Australian economy can successfully transition away from the resources boom that has driven the market. Australia’s strong domestic demand growth appears to be slowing as we follow other developed economies. Some economists are even saying we are due for a recession.
We know it’s smart to spread your investments across different markets, and that there are opportunities elsewhere, so why do we favour Australia to such an extent?
In the past, it was difficult to trade on international stock exchanges. You had to find a broker who could access these markets and who would then charge you massive fees. But today, it’s much easier. A number of well-known online brokers allow you to buy and sell shares on international exchanges at reasonable prices.
In addition, there has been a rise in the number of managed funds and exchange traded funds offering a cheap, easy way to invest in a broad range of overseas markets.
While Australians continue to hold most of their share investments in local stocks, they are starting to warm to the opportunities abroad.
The RBA found that for the first time in decades, Australians now have more invested offshore than foreigners have in the ASX. And during 2013, the amount invested in international share funds grew while the amount invested in Australian share funds fell.
There’s a world of opportunities out there. The Albert Park Investors Guild’s World Dominators and Wealth Havens portfolios invest in the best international opportunities. Quality, industry dominating companies, and listed funds that access opportunities not available here at home.
Regards,
Meagan Evans
Investment Director, Albert Park Investors Guild
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