Investors look to overseas markets

It can be tempting to stick with home grown investments, but the Aussie sharemarket is small by global standards, accounting for a little over 2% of the world’s total equity market. In addition, the ASX tends to be dominated by resource stocks and the financial sector.

Adding overseas investments to a portfolio provides valuable diversification. It also allows investors to tap into some of the world’s biggest companies – like Facebook, Google and Apple, as well as sectors like pharmaceuticals that aren’t well-represented on the local sharemarket.

In the past, investors faced a number of hurdles investing overseas. Brokerage on global shares was a lot more expensive compared to Aussie equities, and the choice of overseas markets we could access was often limited.

Things are very different today. Exchange traded funds (ETFs) are making it easier and cheaper to gain diversified exposure to global asset markets. The sheer choice of ETFs available means investors can pick from a fund the focuses broadly on international equities, and/or ETFs that drill down to a particular region or country.

That’s seeing more of us embrace international investing. According to ETF giant Vanguard, global equity ETFs were the asset class of choice for Australian investors in the first half of 2021. Part of this interest is being driven by rising vaccination rates that are helping economies reopen – and investors are seizing the opportunities this may provide.

Investing internationally has always had the potential for strong returns. Over the last five years the MSCI ex Australia Index, which measures returns on global markets outside Australia, has dished up annual returns averaging 15.03%. Over the past year, the market notched up exceptional gains of 35%. By comparison, Aussie shares have recorded 5-year gains averaging 6.3% annually, with a 1-year return of 22% over the last 12 months.

It’s important to realise that while impressive returns are possible, investing offshore also brings additional risks. This can include exchange rate risk and geopolitical risk – both of which can be unpredictable. An ETF that uses hedging can  manage currency fluctuations. But as we’ve seen in recent times, countries can experience significant political turmoil, which can filter through to asset markets.

Deciding whether international investing is right for you is a personal choice, and just like Australian shares, global equities should be seen as a long term investment – one that you commit to holding onto for at least 5-7 years.

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.