Domestic investing brings valuable international exposure. Here’s why investors shouldn’t disregard local stocks when diversifying.
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Australians have a bit of an inferiority complex when it comes to our share market. Perhaps it’s actually just another case of tall poppy syndrome, where knocking down high performers is almost a national sport.
In the Australian financial independence community, a common refrain is to invest heavily away from Australia.
At purely face value, that makes complete sense.
You shouldn’t put all of your eggs in one basket; somebody might come and knock it over.
Similarly, you shouldn’t make all of your investments in one company, sector, or location. For instance, even the best performing company won’t stay bulletproof forever. It’ll merge or demerge; it’ll eventually take on a risky strategy that underperforms or just as badly adopt a strategy that is too conservative and be overtaken by its competitors.
The same holds true to countries and regions as a whole. As Asia rises now, perhaps South America or Africa will be next.
So it’s completely logical for Australian investors to wet their feet by stepping off our island continent’s shores.
However, while shares in the United States or Asia are often seen as tickets to growth, investors shouldn’t cut off their nose to spite their face.
Australian shares can actually offer access to many of the same international opportunities as overseas stocks, though their performance mileage will vary. Here’s why you shouldn’t automatically discount Australian shares if you’re looking for international exposure.
Australian stocks in international markets
Just because a company is domiciled in Australia doesn’t mean its operations are limited to Australia. In just the same way that companies like Facebook or Toyota can operate here, Australian companies can operate overseas. This can happen directly via the parent company, through an Australian-owned local subsidiary, or through part-ownership in foreign companies.
And just like in sport, we perform above our humble size on the international stage.
Take, for instance, the current leader on the ASX by market cap — CSL Limited (ASX:CSL). It has a wide global footprint centred in the USA and Europe, researching and selling its biotechnology products. It’s a genuine world leader in its field and has performed well for investors by tripling in price over five years.
Occasional biggest ASX market capitalisation leader BHP Group Limited (ASX:BHP) is another company with global reach. “The Big Aussie” grew to be a dual-listed Australia-UK entity following an international merger in 2001. The mining giant is also big enough to be in the top 10 of the English FTSE 100.
In the finance world, investment banking company Macquarie Group Limited (ASX: MQG) has two-thirds of its income from international operations. Meanwhile, in the hospitals spaces, Ramsay Health Care Limited (ASX:RHC) might be known locally as the largest Australian private hospital operator. However, its reach spans 11 countries in total, and while Australia takes the biggest single chunk of income — 55% of income is international.
There are, however, countless more examples of Australian companies listed on the ASX — large, mid, small, and microcap alike — that either has partial or full international exposure. In fact, some 12% of companies listed on the ASX are based internationally.
International exposure can be lumpy
One of the criticisms of Australia is that it’s only a small market. That’s certainly true. We only have around 0.33% of the world’s population, and 1.7% stake of the entire world’s economy. As wealthy as we may be on a per capita basis, obviously we have a limited market opportunity, and it’s also a mature market (and hence less likely to significantly grow economically).
So it makes perfect sense for Australian investors to look overseas for additional investment opportunities that tap into new technologies and broader growth prospects.
Australia has also ridden its luck. Until coronavirus, it had a 29-year run of consecutive growth before recession struck in 2020. In that same period, the United States had two recessions in 2001 and 2007–2009.
So what does that mean for investment performance?
Between early 1992 and at the time of drafting this article in mid-2020, the ASX200 had risen by around 350%. Meanwhile, the S&P500 had risen by around 750%. Ouch.
The German DAX had also seen a rise of around 725% at that time.
So is it any wonder that Australian companies and investors alike look for international opportunities? I can certainly see why investors want some American exposure, even if it means taking greater hits from recessions along the way.
Yet it’s not that Australia necessarily underperforms. The Chinese Shanghai Composite Index had quite surprisingly only gone up around 250% in that timeframe; the previously mentioned FTSE100 had only gone up around 325%, and investors in the Japanese Nikkei 225 only saw positive returns of around 45%. (All of the above numbers are without any dividend returns.)
If nothing else, it goes to show the importance of diversification. While the Australian stock market has done okay, it could also do much better — or worse for that matter.
But as always, past performance is not an indicator of future performance. There’s nothing to say Australia won’t turn into another America — or Japan for that matter (or vice-versa for those countries’ stock markets to have a reversal in fortunes).
International exposure gone wrong
As you can see with the Japanese index example above, not all international investments are gold-plated, guaranteed successes — despite being home to some incredible companies.
And while this article is primarily about the virtues of Australian companies that have international exposure, that likewise doesn’t mean that Australian companies operating internationally are guaranteed success. Like I said in the introduction, companies can take risks that backfire.
Take Insurance Australia Group Limited (ASX:IAG), which used to have an Asian arm; former ASX top-dog Commonwealth Bank of Australia (ASX:CBA), or Australia and New Zealand Banking Group (ASX:ANZ).
Each sold out of underperforming Asian investments. Success in one area — such as finance — in one market doesn’t translate to automatic success in another market (even if that market is strong and profitable).
Lynas Corporation Limited (ASX:LYC) is another example of how an Australian company can struggle internationally. The rare-earth miner that technically has incredible prospects has instead had all sorts of problems with operations in Malaysia.
So it’s sometimes more prudent to play at home, where the political and economic environment is more stable. For investors looking to reach FIRE, and who are looking for a FIRE portfolio that’s more defensive, Australia can provide a level of safety.
Nearby or foreign investment focus?
So what does all of this mean? Am I saying that investors should focus on Australia when modern-day traders have access to all number of international markets? Certainly not.
Rather, I simply hope that this article encourages Australian investors alike to not discount Australian stocks (or stocks in your local markets if you’re an international reader).
When you buy into Australian stocks — whether individual companies, or active or passive funds — you are not just buying into a market of 26 million people. Instead, you can buy into Australian companies that are tied into broad international opportunities across billions of people.
I think that Australians should be proud of our companies — regardless of whether they carry international exposure or not. But we don’t have the world cornered, and we never will.
Diversification is vital.
Your portfolio should have a range of assets in different locations, as we’re aiming to have.
You shouldn’t buy three houses next to each other on the same street. After all, you never know when market sentiment will turn against a suburb, or if the government will decide to put a highway through and bulldoze them all down…
None of this will be news to seasoned investors. But that doesn’t necessarily mean that you shouldn’t buy one of those houses on the same street (which just happens to be in Australia).
So next time you invest, remember that domestic investing can also bring with it valuable international exposure.
Cheers,
Alex
Originally published at https://hishermoneyguide.com on October 15, 2020.
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