As 97% of all listed equities are traded outside of Australia, it’s not surprising that investors find themselves underweight global equities. The core reason to invest offshore is to access global influences that aren’t accessible via the ASX.
International equities can offer investors access to superior value, growth and/or currency tailwinds relative to domestic. A portfolio of purely domestic equities not only limits opportunities, but also concentrates risks toward the Australian and regional economies.
Why Invest Internationally and Considerations
The Australian sharemarket represents approximately 2% of the world’s sharemarket capitalisation. Therefore, investing internationally delivers the benefit of diversification. This is diversification to overseas markets that may behave differently to the Australian sharemarket and in providing access to industries that Australia’s sharemarket delivers only limited opportunities to access. These industries include healthcare/ pharmacy, consumer discretionary (global brands) and technology.
However, the yield on international shares is often lower than
Australian shares and does not include the benefit of franking credits so the after tax impact of investing offshore should be considered. Income from international shares may also be subject to withholding tax. Currency translation can have a positive or a negative impact on returns depending on the state of global markets and the value of the AU$ vs US$.
International equities can be bought directly, indirectly via a pooled investment such as a managed fund or via an Exchange Traded Fund (ETF). If bought directly, investors need to consider transaction costs and holding costs. International shares may be held directly (via certification) or indirectly via a custodial arrangement.
Leverage to a softer AU$
Global currency re-alignment due to the strengthening US$ remains Chief Economist Michael Knox’s highest conviction call for 2014. The US Fed is now removing the monetary stimulus to which equity markets had become addicted. Real growth is picking up the slack, with US growth forecast to be above its long term trend in 2015.
Additional headwinds for the AUD include:
- weakening commodity prices.
- weakening Australian Terms of Trade.
- the recent willingness for the RBA to again jawbone the currency lower, whether it acts on rates or not.
Timing is impossible to call, but we believe these headwinds will see the AU$ eventually weaken. Again this supports offshore focused equities with high proportions of US$ revenues.
As always, speak to an adviser to discuss the suitability of international investments to your portfolio and to fully understand the implications of currency exposure where applicable and how fluctuations may impact returns.