A home country bias is a common trait among Australian investors. This is understandable as people typically like to invest in businesses and industries they are familiar with. However, by limiting your exposure to international companies, you may be missing out on many opportunities around the world. Global market investment strategies allow for greater portfolio diversification, as you are exposed to a multitude of great companies and sectors that may not be available in the Australian market. Furthermore, the practice of investing outside of Australia allows you to become more familiar with the global economy, which can be used as an advantage when making investment decisions. At Monex, our goal is to assist our clients by providing ease of access to various international markets. By providing an easy to use, low-cost trading platform with access to over 10 markets, our clients are able to diversify their portfolios more effectively and gain exposure to multiple markets.
The Australian market is dominated by only a handful of companies and sectors. When breaking down the top 200 ASX companies by sector, it is clearly evident that the financials and materials sectors are dominant in the Australian market. This could be due to many factors, but the most obvious are the mining and housing booms that have occurred in Australia over the last decade, which has led to strong growth for those companies involved.
Sourse: ASX (As of Sept 1, 2017)
Although these sectors have grown at a sound pace over the past decade, their future potential for growth is questionable as the global economy shifts to a different landscape. Interest rates are expected to increase, new emerging investment trends begin to arise, and geo political events are significantly impacting the markets.
With all that is happening in the world, it is fair to assume that Australia’s potential for growth may be questionable – as such, both the financials and mining sectors have underperformed in 2017. Furthermore, the Australian share market as a whole has underperformed relative to the rest of the world. At the present time, the Australian All Ordinaries (XAO) has grown 5.01% in 2017. This is significantly less than the performance experienced by the US market, where the US S&P 500 index grew by 15.21% and the NASDAQ Composite Index by 24.77%. Furthermore, if we compare Australia’s performance to its Asian counterparts, we see Japan’s Nikkei (NIK) grow by 17.29% and Hong Kong Hang Seng (HSI) grow by a staggering 29.97%. As the below comparison clearly demonstrates, Australia’s performance relative to other advanced economies has been weak.
Performance Comparison of Australian and US Markets – 2017 (as of Nov. 1)
Source: MarketWatch (As of Nov. 1 2017)
In addition, the Australian market makes up less than 3% of the global market cap (Vanguard research 2016), which means that if you are only invested in Australia, you are missing out on over 97% of the investment opportunities available. With that said, it’s no wonder Australia has underperformed against its peers!
More industries To Invest In
Investing in international equities is the one of the best ways to diversify your portfolio into various industries. As previously noted, the Australian share market is heavily dominated by Financials and Materials (mining) sectors. But what if you want to invest into other sectors, such as technology or health care?
By Investing internationally, the investment possibilities are far greater and the ability to explore new sectors and markets ultimately adds value to your investments. Investors can access industries that aren’t available in the Australian share market. These include everything from long-standing industries such as automotive manufacturers like Toyota and Tesla, to more recent technology companies such as Apple and Tencent.
Furthermore, since Australia is an advanced economy, the room for economic growth is limited when compared to a developing economy, such as China for example. The Chinese stock market has seen staggering levels of growth in the last decade compared to most advanced economies. By diversifying internationally, you are able to increase your exposure to the stock markets of developing economies, thus potentially increasing your potential gains!
Ultimately, by broadening your investment horizon and dipping into unfamiliar territory, one of the most valuable things you will gain is experience through investing. By limiting yourself to only Australian equities, your investment knowledge is capped by information that only affects Australia. Investing overseas provides access to over 97% more opportunities, sectors and countries! Some with greater potential than Australia. By investing with Monex, you now have greater access to a variety of markets, all at a low cost – with brokerage starting at USD $9.99 and ranging between 0.10-0.30% depending on the size of your order and market you decide to trade on.