With the relative strength of both the Australian economy and currency the astute investor is now, more than ever, considering investing into international assets, in this article we consider the pros and cons of sending your money offshore.
Investing internationally is one of the best ways to diversify your portfolio, maximise your investment opportunities and build your wealth.
Everyday, millions of Australian consumers use products made by global companies – yet we are traditionally hesitant to invest overseas. Australian based investments form a tiny portion of the world's total investment markets. If you only ever buy shares in Australian-listed companies, you'd miss out on more than 98% of global share market opportunities.
The Australian market is concentrated
There are around 2,200 Australian companies listed on the Australian Stock Exchange (ASX), compared to nearly 3,150 companies listed on the New York Stock Exchange alone. In the ASX, finance is the dominating sector (banks, insurance, etc) representing more than 30% of the market.
Not only does the Australian share market have most of its companies concentrated in just a few sectors, a small number of large companies dominate each of these sectors.
This concentration means that if any one company underperforms, it can have a significant effect on the market's return and can affect overall market sentiment. It also means there are fewer investment opportunities if you want to invest in large blue chip companies.
There are greater growth opportunities available offshore Some of the world's most profitable growth industries include telecommunications, technology and healthcare – industries you won't find much of in the Australian market.
More than 15% of the S&P 500 (a US index comprised of 500 US domicile companies) is invested in leading technology stocks such as Intel, IBM and Microsoft, not to mention the impending listing of internet company Facebook which is estimated to be a 100 billion dollar IPO.
The information technology sector in Australia makes up only 0.4% of the market. The healthcare industry represents only 3.4% of the Australian market compared to 12.4% of the New York market. International companies such as Glaxo Smith Kline and Johnson & Johnson are only available as overseas investments.
Offshore investments can reduce risk
If you choose to buy a combination of Australian and international investments, combination can actually provide less investment risk than a purely Australian-basedportfolio because your money is spread across a far greater number of countries, industries and companies. Just like diversifying across many stocks, diversifying across many countries helps reduce overall investment risk as other economies and markets move differently to our own. Throwing your net more widely offers you further protection and potentially greater returns.
Rising economies, rising opportunities
Just as rich economies and markets like the United States, Japan, Britian and Australia tend to perform differently to one another, so do the emerging economies and markets.
An emerging market is the market of an economy that is in the process of rapid growth and industrialisation. Think of China or India or Brazil. Owning stocks in these markets will add another level of diversification to your portfolio. Emerging markets historically have provided higher average returns than developed markets, but they also tend to be riskier and more volatile. This is because their systems of law, ownership and regulation are still developing and they are often less politically stable.
From January 1988 to September 2009 emerging markets returned an annualised return of 6.44% better than developed markets.
What about currency effects?
International share fund returns have a share component and a currency component. Over the long term, the share component tends to be larger than the currency component. The size of each component varies considerably over shorter timeframes.
You may not realise that currency can act positively as another level of diversification in your investment portfolio. When the value of the Australian dollar falls, this is positive if you've invested in international share funds as the value of international assets (measured in Australian dollars) rises. However, if the value of the Australian dollar rises, your returns would be negatively impacted. This is the risk with currency – any losses or gains have to be converted back to Australian dollars.
How can I get access to these shares?
People generally invest in international shares via a managed fund. However, some advisers can also help you buy and sell international shares directly.
For more information please contact one of our advisers.
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