Thinking bigger than the ASX: is it time to diversify into international shares?

For Aussies, international share diversification is not something we tend to consider. We’re a country of property fanatics with a stable economy and, in the form of the ASX, a developed and dividend-generous share market. What’s not to love about that?

However, investors need to understand that we are a miniscule drop in an ocean of great opportunities – and not assessing these possibilities may be costing you.

 

 

Why look beyond the ASX?

The total value of the global equity market in 2023 was priced at USD 109 trillion (AUD 164 trillion) – and the ASX represents a mere 1.5 per cent of that figure.

For comparison, the United Kingdom sits close to 2.9 per cent, Japan at 5.4 per cent, and the EU at 11.1 per cent. The massive United States stock market (home of the famous NYSE and Nasdaq) is worth 42.5 per cent, or USD 46.3 trillion (AUD 70 trillion).

 

Historical returns

The figures don’t lie. Over a 10-year period, Saxo measured the total performance (inclusive of dividends) of the ASX 200 index against other major global indices:

Country	Total Return	Annualised Return (p.a.)	Index
Australia	139.54 per cent	9.2 per cent	ASX 200: the 200 largest Aussie public companies.
Europe	109.85 per cent	7.75 per cent	Euro Stoxx 50: Europe’s top 50 public companies.
Japan	217.96 per cent	12.36 per cent	Nikkei 225: the 225 largest public companies of Japan.
United States	214.25 per cent	12.23 per cent	S&P 500: the 500 largest US public companies.

 

While the ASX 200’s attractive dividend yield has pushed its annualised return above the Euro Stoxx 50, the Japanese Nikkei 225 and US S&P 500 have achieved far superior returns over this time. While it is challenging to predict future market movements, sticking only to Australian markets could be limiting your potential returns.

Even after accounting for fluctuations in the Australian dollar, an investment that earned you AUD 1 in profit in the Australian market over this 10-year period could have earned you AUD 3.62 in the United States.

 

 

Diversification: investing’s only ‘free lunch’

Separating your investments across different regions and sectors is important for spreading risk. The process known as diversification ties back to the old phrase of “not carrying all your eggs in one basket” – meaning that if you were to “drop” a basket, you won’t lose all your eggs.

An ASX-only portfolio means every penny of your wealth is at risk of shocks and corrections facing the Australian market. Instead, by spreading your capital across different regions, you reduce it – minimising your risks and maximising your long-term return potential.

Despite this, the ASX Investor Study 2023 found that only 16 per cent of Australian investors directly hold international shares – compared to 58 per cent who directly own ASX-listed shares. That means there’s a significant number of Australians who are yet to geographically diversify their stock holdings.

So why should investors take this step? Saxo sees seven different reasons:

1. Risk mitigation: By investing in multiple geographic regions, investors can reduce their exposure to the risks inherent in any single market.
2. Economic cycle diversification: While one country may be experiencing a period of economic expansion, another may be in a recession. By diversifying geographically, investors can position themselves to benefit from various stages of the economic cycle.
3. Sector diversification: By spreading investments across different countries, investors can gain exposure to sectors that may not be prevalent in their home market – for example, the US tech sector or European healthcare sector.
4. Currency diversification: Investing in multiple currencies through geographical diversification can act as a hedge against currency risks.
5. Access to growth opportunities: Emerging markets, such as India, can offer the potential for higher returns due to rapid economic growth and industrialisation.
6. Access to global brands: Geographical diversification enables investors to gain exposure to globally-recognised, reputable brands and companies – whether it’s Apple or Amazon (US), Panasonic or Sony (Japan), or Nestle and Ferrari (Europe).
7. Regulatory and political diversification: Diversification can reduce the impact of adverse regulatory changes or political instability in any single country.

Stock picking is a difficult skill to master and can easily become overwhelming. The good news is that it’s never been easier to diversify – the market for Exchange-Traded Funds (ETFs) offers a wide variety of powerful diversification options, from active to passive. Through ETFs, investors can gain exposure to a huge number of companies and sectors around the world. Saxo offers more than 7,000 ETFs for investment through its platform, from as little as USD 1 brokerage.

 

 

SAXO AUSTRALIA’S TOP FIVE MOST POPULAR* US-LISTED ETFS:

1. Vanguard S&P 500 ETF (VOO)
2. ARK Innovation ETF (ARKK)
3. Invesco QQQ Trust Series 1 ETF (QQQ)
4. SPDR S&P 500 ETF Trust (SPY)
5. ARK Genomic Revolution ETF (ARKG)

Geographical diversification is a powerful strategy for investors looking to optimise their portfolios and achieve long-term financial goals. Diversification is commonly dubbed as the “only free lunch in finance” and, to be a successful investor, you must learn its fundamentals. Consider spreading your wings and investing in foreign equity markets – with Saxo’s razor-sharp pricing and wide range of global equity markets, it’s a great time to get started.

* By Saxo Australia clients with open positions. Current as of 10 May 2024.

Disclaimer: Saxo Capital Markets (Australia) Limited (Saxo) provides this information as general information only, without taking into account the circumstances, needs or objectives of any of its clients. Clients should consider the appropriateness of any recommendation or forecast or other information for their individual situation.

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