Can you achieve global diversification with multinational companies?
A Morningstar report explores if the benefits of global investing can be achieved by investing in global companies trading on local exchanges.
Mentioned: ANZ Group Holdings Ltd (ANZ), BHP Group Ltd (BHP), Commonwealth Bank of Australia (CBA), National Australia Bank Ltd (NAB), Sanofi SA (SNY), Westpac Banking Corp (WBC), Woodside Energy Group Ltd (WDS)
Morningstar is a proponent of investing globally to increase portfolio diversification. Our suggested allocation for an aggressive portfolio calls for a 48% allocation to global equities with a 34% weighting for Australian equities with the remainder made up of other asset classes. Investing in global markets provides exposures to industries that may not be prevalent in an investors home country and insulates investors from localised economic issues.
This exposure can be achieved in more than one way – investing in a company trading on an international exchange, an ETF/fund that contains international securities, or buying a domestic stock that has operations globally. That last method is often ignored by investors but still provides underlying exposure to a variety of markets. This is the point of diversifying globally in the first place. It also happens to have some heavyweights in its corner.
Both Jack Bogle, who founded Vanguard, and Warren Buffett, of Warren Buffet fame are proponents. They both believed that investing in US companies would have enough diversification to provide the desired benefits.
Jack Bogle expressed these views in a book that he wrote in 1993, while Buffett has simply stated investors directing 90% of their assets to domestic equities and 10% to treasury bonds is enough diversification for most investors.
A lot has changed in the world since they expressed these views. In the past few years, we’ve seen a contraction of globalisation after Covid exposed dependencies on global producers of essential goods and renewed geo-political rivalries
This phenomenon has been coined ‘slowbalisation’, and offshoring has been replaced with onshoring and reshoring. As well as Covid, inflation and the war in Europe have exposed the downside of global supply chains, and catalysed self-sufficiency measures. So, the question is, did the argument for investing in domestic multinationals for international exposure have a leg to stand on, and if it does, after slowbalisation, is it still relevant?
Both Bogle and Buffett have admitted that this approach is not driven by hard data, but instead, it’s driven by a preference.
This preference is shared by many investors including those in Australia where we have a strong home bias to the local market. This is partially driven by the difficulties and costs associated with international investing. These include:
- Hurdles with access: a lot of progress has been made to lower this barrier for individual investors in Australia by broadening the countries serviced by brokers and offering ETFs with international market exposure. Yet impediments remain limiting access to many markets and the cost can be significantly higher than investing in local shares.
- Unfamiliarity with companies: Adding to the foreign economy and market, investors have to grapple with companies that they are unfamiliar with. This adds a level of complexity for investors and often requires outsourcing to professional investors.
- Taxes: Taxes are more complicated than investing in domestic assets. You can read more about the tax considerations for international investing here.
- Currency: With international investing, the stock performance is one part of your investing return. The other part is currency. A weaker or stronger Australian dollar against the currency of the company you’re investing in will add or detract from your investment returns. The cost of foreign exchange is also another consideration for investors.
Given all of these extra considerations, it is understandable that investors are avoiding international investing. It is much easier to find a company with global exposure that trades on a local exchange.
A recent Morningstar study explored the ability to access global markets through multinational companies
Morningstar has conducted research (available to subscribers of Morningstar Investor) on whether investors can expect to receive the same diversification benefits by investing in multinationals that are based in their home market.
The study was conducted across 48 markets that make up the Morningstar Global Markets index. The Morningstar Global Markets Index is a broad gauge of equities across developed and emerging markets, containing 8,399 constituents.
This research is conducted on a yearly basis, allowing us to set a benchmark and determine if the overall global market has become more or less globalised in terms of the revenue generated in countries outside the headquarters of a company.
Across the 48 markets in the study, we saw 25 markets that became more globalised, 18 became more domestically focused, and 5 stayed constant.
When we look at regions, the world’s four largest equity markets – the U.S, Japan, The UK and China, all sourced larger shares of revenue internationally than they did last year but they were all small moves – 1 or 2% less domestic revenue.
Dominant sectors in each market did not appear to be a key factor in the overall direction of a specific country. Australia is resource heavy with many of those mined commodities exported globally. Brazil, Chile and the UAE are similar, and all became more global. But, Canada, Peru, Saudi Arabia, Norway, South Africa and Qatar are also resource heavy, and they did not become more global. This was the same for technology heavy markets – there was just no clear trend.
Looking at Australia, and the similarly populated and resource-oriented Canada, they are both around a 50/50 split domestic and international. Canada sources 30% of their revenue from the US, but China is Australia’s biggest external market for Australia at 13%. The only other economies that are that dependent on China are Taiwan, at 18% and Hong Kong at 17%.
The US sources more revenue internationally than it did last year, and that was due to multinational goliaths such as Apple, Microsoft, Tesla and Alphabet. There were also many markets that increased their US revenue representation, with Ireland, Canada, Switzerland, Denmark, Taiwan, the UK, Germany, France, and Belgium all having more than 20% of their revenue coming from the US.
Comparatively, emerging markets like Egypt, Pakistan, China, Peru, and Indonesia remain the most domestically oriented. In contrast, European markets remain the world’s most global, with favourable trade conditions and geographical proximity. Excluding Greece, European markets are dominated by global companies.
Overall, we can see that markets are globalising, opposed to this view of slowbalisation which seems to be the dominant narrative. It is important to remember though, that comparing companies and their regional revenue is only one part of the picture, and they are not comparative to national economies.
A company specific example
Let’s look at a company example, and what exposure that means for an investor in Sanofi.
Sanofi (SNY) is a French multinational pharmaceutical and healthcare company. It covers a suite of medical issues and is the world’s biggest vaccine producer. Naturally, this means that their operations are global, and their revenue is diversified into different markets.
For example, a dengue fever vaccine in 18 countries and Menactra, a meningococcal vaccine that is the first to be approved for use in infants, is widely used.
Sanofi is listed on Euronext Paris, as well as the New York Stock Exchange. If you are a French investor, investing in Sanofi, you would be exposed to the United States – 36% of revenue, Europe accounts for 19%, France only accounts for 5.76%, and other countries account for 33%. It has steadily become more and more globalised, with less revenue originating in France as the years move on.
This means that although, as a French investor, you are investing in a domestic equity, you are reliant on the revenue streams from other markets for your investment to succeed.
The Australian context
Australia’s market is composed heavily of financials and resources. When we look at the stocks with the highest market capitalisation, we can see the big four banks with resources intertwined.
The composition of revenue regions for the banks are similar for the most part – Australia makes up the majority of their revenue – ranging from 63.87% for ANZ (ANZ), to 86% for Commbank (CBA). New Zealand is the majority of the remaining revenue. ANZ is the outlier of the big 4, with 13% of their revenue coming outside of Australia and New Zealand. Ultimately, this is not a significant percentage.
Mining and resources are a little bit of a different story, but offer exposure to China, with BHP (BHP) deriving 56.25% of their revenue and 12.91% from Japan, and only 2.53% from Australia. Woodside (WDS) is similar, with 84.9% of revenue coming from Asia, and just over 4% coming from Oceania as a whole. Although it does offer exposure through international revenue streams, they are skewed heavily towards one region.
The popularity of banking and mining limits the diversification benefits that many Australian investors receive from buying large companies that trade on local exchanges. When we’re looking at revenue sources for public companies, it is only just one piece of the exposure that you get to a country.
Foreign investments allows you to access opportunity sets in sectors that are not available domestically. For example, in Australia, the technology sector is nascent. You’re able to access technology companies in other countries where the industry is stronger and more developed such as the US, Korea and Germany, with economic and regulatory frameworks there to support the success of those industries.
For investors, the globalised revenue sources do blur the lines between their domestic equities and their international equities portion. Jack Bogle and Warren Buffet weren’t wrong when they claimed that you can get global exposure from domestic companies, but it cannot replicate national economies and conditions. It cannot replicate investment opportunity sets outside of borders. It cannot replicate sector diversification. It is not a replacement, in our opinion, to international investments that offer true diversification.