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Special Topic Week: Global Equities

Emma Rapaport  |  14 Sep 2021Text size  Decrease  Increase  |  
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When it comes to diversification, the 9 million Australians holding investments outside of their home and super fund still tend to place all their eggs in one basket. Just 15% of investors hold international shares directly, according to the latest ASX Australian Investor Study, compared to 58% who hold Australian shares.

Home bias—or the favouring of domestic shares—is by no means unique to Australian investors. There are good reasons why equity investors around the world favour their home markets. The imputation credits earned by holding shares in locally listed companies are an alluring tax incentive for Australian investors. Greater familiarity with local companies also influences the decision of many investors to stick with domestic equities. Investors also worry about being exposed to currency risk—the risk of losing money due to unfavourable moves in exchange rates.

If the Australian market is associated with franking credits, it's also renowned for being small (around 2% of global markets) and heavily concentrated. Collectively, the financial and mining sectors account for about 50 per cent of the ASX 200 Index. That's a lot of eggs in one basket. The move by BHP to list all its shares in Australia creates further concentration risk in the local index. Conversely, information technology stocks account for less than 3%.

In contrast, MSCI World ex-Australia index, which represents large and mid cap companies across 22 of 23 Developed Markets countries, has a 21.5% exposure to tech firms. The MSCI Emerging Markets index has a 21.31% exposure. US companies such as Microsoft, Apple, Amazon, Google and Facebook are among the best businesses the world has ever seen. Add to that leading payment companies such as Mastercard and Visa, innovators such as Tesla and Netflix, consumer brands such as Starbucks, Proctor & Gamble, McDonalds, Gillette ... the list goes on, and all well-known to Australian investors.

Knowing the benefits of diversification can help reveal new opportunities, and help you avoid constructing a portfolio that is too concentrated and potentially vulnerable to a domestic downturn. Diversification does not eliminate the risk of investment losses, but a multi-asset portfolio can provide a better hedge against economic and market outcomes.

"Pairing assets that zig and zag at different times in response to different fundamental drivers like inflation, differences in fiscal and monetary policies, and so on, is generally a good way to reduce portfolio risk and thus (in theory) boost your odds of sticking to your plan," Morningstar analyst Ben Johnson.

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Change is coming. Seventeen percent of investors told the ASX last year that they planned to invest on international exchanges, while many 'next generation' investors are interested in investing in diversified investment vehicles like ETFs and LICs.

It's long past time to move past our home country bias. There are no excuses for a lack of diversification into global names. The cost of investing in overseas markets has come down markedly, as have the barriers to information. And if individual stocks aren't your thing, it’s simple to gain broad exposure to global stocks via managed funds, ETFs, and LICs, including hedged products.

In this special report, we provide the insights, strategies and tools to do just that. We share some of our best global equity investment ideas and offer blueprints for building globally diversified portfolios.

Guides

Morningstar guide to international investing
In this exclusive guide, discover trusted strategies to identify the right overseas investment for your portfolio.

How to invest in overseas stocks
Few barriers to investing in the US, UK, Canada, Germany, and Japan.

Economic and sector outlooks

US economy on track to recover despite road bumps
Surge in delta-variant will only moderately delay the return to normal.

How real are the regulatory risks facing Big Tech?
An internet analyst gives insights into three key risks faced by Big Tech and implications for share prices.

Best fund ideas

Best global equity ETFs for Australian investors
These exchange-traded funds all earn Morningstar medallist ratings.

What are top-rated global equity managers holding?
Seeking out US tech and businesses with strong competitive advantages.

Best equity ideas

6 global equity names for your portfolio
Three wide-moat dividend payers and three non-tech Chinese stocks.

7 US stocks to buy on a dip
These wide-moat, low-uncertainty names may be fairly valued today, but they should be on quality seekers’ watchlists.

9 undervalued Chinese stocks that have been oversold
Regulatory risks for Chinese companies are far from over, but we do think they present an opportunity for investors.

Solar stocks are too hot
Enthusiasm for renewables has these solar names trading at premiums to fair value.

Finding renewable energy stocks around the world: Charts of the week
Look to Asia and the US for renewable energy and green transportation.

 

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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