Article first published on the ASX on 7 May 2021.
The latest global economic data is continuing to surpass market expectations with consumer confidence on the rise and market volatility at a 14-month low, in part due to the positive outlook for global growth.
Optimistic economic news like this is the perfect catalyst for favourable market conditions. For many Australian investors, this recent boost in global sentiment is a timely reminder to explore offshore investments.
Case to include international investments in your portfolio
The Australian sharemarket comprises about 2.2 per cent of the global market and is dwarfed by the US, which makes up over half of the global market capitalisation, along with Japan, the UK and China.
The local market comprises mainly banks and miners. Resource companies and financial institutions account for almost half (46%) of the S&P/ASX 200 index. Compared to other large developed markets, Australia has less exposure to sectors such as technology and healthcare.
Diversification is the key reason investors should be looking offshore, particularly to build a well-rounded portfolio. A portfolio with investments across countries and sectors is proven to increase overall performance and minimise volatility, according to historical returns over the last 10 years. This year alone, the NASDAQ has gained 11 per cent, while the S&P/ASX200 gained 6 per cent.
Different global economies operate in different cycles, so there are significant benefits of having exposure to companies across various countries. For instance, the International Monetary Fund (IMF) expects the Australian economy to grow at 4.5 per cent this year.
On the other hand, the IMF predicts India’s economy to grow by 12.5 per cent and China’s by 8.4 per cent, presenting a compelling investment opportunity for companies well positioned to benefit from this growth.
Accessing offshore opportunities
There are several ways to include international investments in your portfolio, via ASX. These include mFunds, which are unlisted managed funds that can be accessed via a brokerage account and held on HIN, and Listed Investment Companies (LICs), which you can trade on ASX.
Overwhelmingly the most popular way to gain exposure to international markets is through Exchange Traded Funds (ETFs), which offer a simple and cost-effective way to invest in a portfolio of international shares.
Rather than spending time buying and reviewing multiple stocks in markets where you may not have on-the-ground intel, buying a single international ETF will give you access to tens, hundreds or thousands of stocks in one ASX trade.
ETFs also offer a great deal of choice. There are broad-market international ETFs that allow you to own all of the world’s largest companies; ETFs that focus on a certain region, such as the US or Europe; and also ETFs that allow you to invest in an individual sector – think technology, healthcare or infrastructure.
For example, an ETF that tracks the S&P500 index – home to the largest stocks in the United States such as Microsoft, Apple, Amazon, and Tesla – provides investors with access to half of the world’s market. Only companies that have grown their earnings over the last four quarters are eligible to be included in the index. This has helped the S&P 500 gain 12% this year.
Across the Bell Direct platform, investors are increasingly using ETFs in their portfolio to add exposure to global markets.
At April 2021, two of the five most bought ETFs were global:
- BetaShares Global Cybersecurity ETF (ASX: HACK), which provides exposure to some of the world’s leading cybersecurity companies.
- Vanguard MSCI Index International Shares ETF (ASX: VGS), which follows the performance of the world’s largest companies, excluding Australia.
With opportunity comes risk
As with all investments, there are risks – and this is no different from investing internationally. The major risk is fluctuations in foreign-exchange rates affecting your portfolio returns.
For example, if you own US equities and the US dollar weakens against the Australian dollar by 5 per cent, the result would be your US equities being worth 5 per cent less when converted to Australian dollars (all things being equal).
Of course, currency risk can also work in your favour. If the Greenback strengthens against the Australian dollar by 5 per cent, this will deliver gains for your portfolio as it would be worth 5 per cent more on selling it.
Also, investing in emerging markets (such as China and India) can provide greater gains as these nations are growing at a quicker rate as they race to industrialise.
Although the potential upside may be tempting, understand the risks associated with emerging markets, including currency volatility and higher transaction costs. Although you don’t see the costs directly when buying and selling ETFs, its worthwhile to keep the transaction costs in mind as they can affect the power of long-term returns.
By spreading investment risk across a broader range of countries and regions, a global focus can help diversify your portfolio and position it for boosted returns.
Investing globally also gives you access to some of the world’s major economies and markets, and the biggest and best-performing companies. As an investor looking to tap the major themes driving global growth, exploring opportunities offshore is a must.