The Benefits of Global Share Exposure in your Investment Portfolio
International shares can deliver diversification benefits and access to the world’s most profitable companies, while also complementing the best that the Australian share market (ASX) has to offer.
Australians’ love affair with the domestic share market is well known, but that infatuation could potentially be costly if investors ignore global shares.
While the ASX has been kind to many financially savvy people over the years, it represents only about 2 per cent of global share markets by total capitalisation. It is also heavily weighted to the major banks, Commonwealth, Westpac, ANZ and NAB, plus mining giants BHP, Rio Tinto and Fortescue.
Although superannuation funds, managed funds and exchange-traded funds (ETFs) can give Australians limited exposure to international markets, they may be missing out on a world of opportunities, literally, to grow their portfolio and long-term wealth.
So, let’s consider the three key advantages of global share market exposure.
- Brand power
The massive size of offshore share markets lets investors access thousands of additional investment options outside Australia, including famous brands such as Amazon, Microsoft, Apple, Starbucks, Johnson & Johnson, Netflix and Alphabet (the holding company of Google and YouTube). As digital technologies continue to reshape the investment landscape, it may makes sense to include them in your portfolio.
- Industry reach
International markets typically dominate high-growth or expanding sectors such as healthcare, technology, financial payments, artificial intelligence, robotics and branded consumer goods, which are all comparatively small industries in Australia.
- Diversification benefits
The mantra of not having all your eggs in one basket is as valid as ever, especially given the domination of the ASX by the major banks and resources companies. Spreading your money, and risk, across different regions, industries and companies can deliver superior risk-versus return scenarios and offset portfolio losses if the domestic economy slumps.
Of course, offshore investing should not be done lightly. Just like any other investment, it can come with risks, including currency, tax and country-specific issues.
Currency movements relative to the Australian dollar can have an impact on financial returns. If the Australian dollar rises in value, it can erode some of your offshore gains, and vice-versa. Some international investors may opt for hedged investment choices. Although they can cost more, this minimises the risk of currency fluctuations
With regard to taxation, it is important to understand that income from your overseas investments is still subject to taxation in Australia, but you may be able to get a tax offset if you have already paid tax in the foreign country. Many Australian equity investors also profit significantly from franking credits, a bonus that you don’t receive with global shares.
As for country-specific risks, a foreign country’s economy could stumble on the back of domestic policy decisions that alter the market outlook for a particular company.
Seek financial guidance
These issues underline the importance of getting the insights of a trusted financial advisor to balance any risks and to determine what is the appropriate allocation of global versus domestic shares for your portfolio.
It is best to have an ongoing relationship with one advisor, or an advisory firm, who understands your risk appetite, has access to reputable equities research and who can buy and sell and adjust your portfolio as markets wax and wane.
What the rise of Amazon and Google et al does demonstrate is that some Australian investors need to become better educated about the scope of global shares. With market knowledge and a smart advisor, the world is your oyster.
To find out more about investing in global shares, speak to one of our Adrians Private Wealth partners.