Want to know more about investing in international markets, shares and securities? This guide provides a simple, plain-English introduction to international investing - including benefits, risks and other considerations.
You can download a PDF copy of the guide here.
Table of contents
- WHY INVEST GLOBALLY
- ACCESSING GLOBAL INVESTMENTS
- HOW TO RESEARCH STOCKS
- WHAT TO LOOK FOR IN A GLOBAL INVESTMENT
- RISKS ASSOCIATED WITH INTERNATIONAL SHARES
- THEMATIC INVESTING
1. Why invest globally?
Investing globally is one of the best ways to broaden your investment opportunities and diversify your portfolio. Some of the world’s most profitable companies and industries are not listed on the Australian share market.
Australian-based investments form less than 2% of the world’s total investment markets and the finance sector makes up around 32% of the companies listed on the ASX. This concentration means if the sector under-performs, it can have a significant impact on the Australian share market.
THREE CRUCIAL BENEFITS OF INVESTING INTERNATIONALLY
- ADDED DIVERSIFICATION
Spreading your investments beyond your home market into different countries and
markets can help diversify your portfolio. This will mean poor market conditions in one region can have a smaller impact on your overall portfolio.
- HIGHER GROWTH
International investing lets you take advantage of the potential of higher growth in foreign countries. It’s important to remember that while some countries may have higher growth and potential returns, they can also have a higher level of risk.
- MORE OPTIONS
You can invest in companies, industries (particularly technology and biotechnology) and other asset classes that are not available or underrepresented on the ASX.
2. Accessing global investments
Types of international investments:
DIRECT INVESTMENT IN OVERSEAS SHARES
Retail investors can now purchase individual shares on most developed and developing world exchanges. Unlike the old days when you had to call your broker (usually from a global broking house) to buy overseas shares, today it’s all done online via brokerages such as Macrovue, CommSec, ANZ, NAB, Westpac and Saxo Markets.
The new breed of online brokers simplifies the paperwork (and in most cases does it for you) and manages the currency conversions; as well as provide you with real time prices and portfolio valuations.
EXCHANGE TRADED FUNDS (ETFS)
These are a type of passively managed fund that can be bought and sold on share markets. ETFs aim to track the performance of a certain market, index or a specific asset class such as international shares or global property. ETFs often have low fees and can provide low cost exposure to international investments. Some trade on the ASX in AUD but the rest can be purchased online via the same brokers that offer overseas share trading.
One of the ways Australians can gain exposure to international investments indirectly is via managed funds. In this investment, your money is pooled with that of other investors and then
invested into the market and an investment manager then manages a portfolio of shares or other assets on your behalf. Some managed funds are global or focus on specific regions such as Asia or Europe, while others focus on specific asset classes in certain regions.
AUSTRALIAN COMPANIES WITH OVERSEAS EXPOSURE
Another way to gain international exposure in your portfolio is to invest in listed Australian companies with international operations. Many companies listed on the Australian Securities Exchange (ASX) have international operations and investments.
3. How to research shares
To be prepared and make sure you make the right decisions, before you invest it’s important you research the country, market, and companies you are investing in. It’s also important to understand the political and regulatory environment in which those companies operate.
Research tools include:
FINANCIAL MEDIA ONLINE
Digital subscriptions to the Wall Street Journal, The Financial Times, and Barron’s are relatively inexpensive. There are also a myriad of free content websites available to you, including sites like MarketWatch and Seeking Alpha. Various blogs and online magazines such as Forbes, Fortune, etc will also contain timely company and market information. Many of these websites will also keep track of your shares / portfolio in real time.
FINANCIAL ADVISER AND BROKER REPORTS
Some advisers and brokers provide research reports on overseas companies, individual countries or geographic regions. This can help keep you up to date with rapidly changing market conditions.
FOREIGN COMPANY REPORTS
If you are investing in a listed foreign company, they are generally required to provide financial reports, such as quarterly, half-yearly and annual reports. To gain access to this information, look at the company’s website and sign up for email alerts on company news and earnings releases. Watch management
presentations via web casts and listen to the questions at the end from Wall Street’s finest.
CABLE TV AND BUSINESS PROGRAMS
Cable TV providers provide daily business programs such as CNBC, Bloomberg TV and Foxtel. These often cover international as well as the local markets.
4. Investment strategies - What to look for in a global investment
SUSTAINABLE COMPETITIVE ADVANTAGE
Investors should focus on identifying companies that have a sustainable competitive advantage within the industry they operate. It may be size, scale, ability to innovate, superior products, technological superiority, skilled management, large (and growing) market share, significant R&D budget etc. Finding this competitive advantage is an important part of the research and investment process.
THE TWO “Ds”
To narrow it down a bit more, investors might consider what we call the “two Ds” strategy focusing on two types of companies. Those who dominate their industry like Facebook or Alphabet (Google) and those who are disrupting the established players (like Amazon and Tesla).
EARNINGS ARE KEY
Company earnings are important! They are the main drivers of share price performance over the medium term. When companies report their earnings (usually quarterly), investors should focus on:
- Did earnings meet or beat the market’s expectations (derived from the company’s previous guidance and analysts estimates)?
- If there was a shortfall, was it a onetime event or something that will affect company performance over subsequent quarters?
- Did the company offer positive guidance for the next quarter?
THE PERFECT STORM
The “perfect storm” occurs when companies beat earnings expectations; provide positive guidance over that given previously for subsequent quarters; and analysts who follow the company upgrade their earnings expectations (and in some cases the target price). This is a good time to be owning that company’s shares.
GROWTH AND VALUATION
Investors should consider whether the company’s rate of growth is sustainable over the medium term (say 3 years); if that rate of growth is superior to its peers (and the overall market); and what could possibly happen to reduce that growth rate.
All things being equal the company’s valuation should be reasonable relative to the rate of growth. In general, a forward P.E. (Price / Earnings) to growth ratio (P.E.G) of 1X is reasonable, 0.5X may be indicating a bargain, and 2X would suggest overvaluation.
5. The risks associated with international shares
Investing in global shares carries all the general risks of investing in shares. There are also other risks that are unique to overseas investments. These risks include:
Foreign investments are usually held in the currency of the country of origin. Income and capital gains or losses must be converted into Australian dollars (AUD) which means you are exposed to changes
in exchange rates. If the value of the AUD rises against a particular currency, the value of investments held in that currency will fall. Conversely a fall in the AUD compared to the currency in which the investments are held will increase the value of your investments held in that currency.
POLITICAL, ECONOMIC AND REGULATORY RISK
International investments are subject to country-specific risks such as political, economic and regulatory changes. You may also need to understand the specific laws and regulations relating to foreign investments in the country you are investing in. That said, the large volume information available online is a very helpful for overseas investors.
TAX ON FOREIGN INCOME
If you are considering international investments, it’s important to know how foreign income is taxed and how this will impact your investment returns. If you are an Australian resident for tax purposes, you must declare income from overseas investments in your tax return. If you have already paid foreign tax on your
international investments, you may be entitled to an Australian foreign income tax offset. Normally your online broker will simplify this process by providing and filing the necessary documents. If you’re not sure, it’s important to obtain good advice.
6. Thematic investing
WHAT IS THEMATIC INVESTING?
Broadly speaking, thematic investing is the approach of taking advantage of future global trends. This ‘top-down’ investment approach helps investors gain exposure to macroeconomic themes and trends. Thematic investing takes a forward-looking approach, which stands in contrast to a relative investing
strategy which relies heavily on market capitalisation to determine weights in a portfolio.
Through thematic investing we can identify industries and companies leveraged to structural growth themes that drive revenues and profits.
BENEFITS OF THEMATIC INVESTING
STAY AHEAD OF THE CURVE
Industries change. Technologies change. Old industries and technologies wither away and new ones are born. In our view, identifying and investing in key themes which will play a large role in our lives in the coming decades is prudent. It might take a long time for an emerging technology to attain critical mass, but once it does so, the growth and adoption can be quite substantial.
LONG TERM INVESTMENT APPROACH
The world is rapidly changing on a number of fronts, driven by demographic, economic and technology forces. Global megatrends are set to play out over the long term. Aligning with these megatrends enables investors to be more long term oriented.
Most themes impact value chains which span multiple industries. Done in a balanced fashion, investing in a theme offers natural diversification across geographies and industries. For example, an ageing population leads to growth in demand for a range of goods & services such as pharmaceuticals, healthcare providers, retirement living communities and annuities or other retirement financial products.
Invest directly in the world's biggest and most innovative companies, industries and trends.
Generally, stock markets close at 4:00pm in their local time zone. After this scheduled time, deals can also be made but the transaction is dated the next day, known as an after-hours deal.
The buying and selling securities when the major markets are closed. After-hours trading was once a privilege of institutional investors, individual investors can now participate. Stocks are traded after hours on ECNs, which match buyers and seller with a computer system in order to execute trades.
Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and time frame.
Resources owned by any entity - a company, an investment fund, etc. For example, assets may be classified as international shares, listed property securities, direct property investments, cash and fixed interest securities.
A unique code used by the Australian Stock Exchange (ASX) to identify listed companies.
One hundredth of one percent, or 0.01%.
A pessimistic investor who believes a stock or the overall market will decline.
A market in which prices of securities are generally declining.
A debt security, rather than a share. Bonds are usually issued by governments and large corporations in return for a principal amount on which interest is paid to the investor for a specified time. The interest rate is fixed - thus the reference to fixed interest security which is applied to bonds and debentures. The principal amount invested is repaid to the investor on maturity.
An individual or trading firm that charges a fee/commission for executing buy and sell orders for an investor.
A fee a broker charges for executing buy and sell orders on a licensed financial market for clients. Brokerage may be calculated as a percentage of the value bought or sold, or may be a flat fee for service.
A person who considers the share price of the stock exchange to be on the rise.
This is when the stock market as a whole is in a prolonged period of increasing stock prices. Opposite of a bear market.
The difference between the proceeds of sale of an investment asset and the cost. If the proceeds of sale are less than cost, a capital loss is made.
The difference between the proceeds of sale of an investment asset and the cost. If the proceeds of sale exceed cost, a capital gain is made.
A fee a brokerage or other financial institution charges for safekeeping services. Safekeeping or custody is a service in which the brokerage or financial institution holds securities on behalf of the client, which reduces the risk of the client losing his/her assets or having them stolen.
A corporate action is any event that brings material change to a company and affects its stakeholders, including shareholders, both common and preferred, as well as bondholders. These events are generally approved by the company’s board of directors; shareholders may be permitted to vote on some events as well. A cash dividend is a common corporate action that alters a company’s stock price.
A comparison of the assets provided by creditors to the assets provided by shareholders. It is calculated by dividing long-term debt by common stockholders’ equity, and serves as an indicator of financial leverage.
A portfolio that holds a variety of assets with different performance characteristics.
A portion of a company’s earnings that is paid to shareholders, or people that own hat company’s stock, on a quarterly or annual basis. Not all company’s do this.
DIVIDEND YIELD (STOCKS)
Indicated yield represents annual dividends divided by current stock price.
DIVIDENDS PER SHARE
Dividends paid for the past year divided by the number of common shares outstanding. The number of shares outstanding is determined by a weighted average of shares outstanding over the specified year.
EXCHANGE TRADED FUND (ETF)
An ETF is a listed fund that aims to track the performance of a basket of shares that make up a particular index. ETFs aim to replicate the performance of a particular index, and therefore are made up of the same shares as the relevant index.
EARNINGS PER SHARE (EPS)
Measures of earnings attributed to each equivalent ordinary share over a twelve month period. Calculated by dividing the company’s earnings by the number of shares on issue in accordance with AASB 1027 ‘Earnings per share’.
The ratio of earnings per share to the current share price, after allowing for tax and interest payments on fixed interest debt. It is calculated by taking the total twelve months earnings divided by the number of outstanding shares, divided by the recent price, multiplied by 100.
An exchange is a place in which different investments are traded. The most well-known in the United States are the New York Stock Exchange and the Nasdaq.
When an order to buy or sell has been completed. If you put in an order to sell 100 shares, this means that all 100 shares have been sold.
These are the ordinary shares. They are different from debenture and also from loan stock.
Describes an investor or a managed fund that aims to achieve steady capital growth over a medium to long term investment horizon.
An index is a benchmark which is used as a reference marker for traders and portfolio managers. A 10% may sound good, but if the market index returned 12%, then you could have just invested in an index fund and saved time by not trading frequently. Examples of indices are the MSCI and S&P 500.
INITIAL PUBLIC OFFERING (IPO)
The first time a company’s shares are offered for sale to the public.
Total number of shares on issue multiplied by their market price. This can be applied to work out the market value of one company or of the value of all companies listed on the exchange.
Order to a broker to buy or sell at the current market price at the time the order is given.
OVER THE COUNTER MARKET (OTC)
Refers to a marketplace outside the main stock market.
A collection of investments owned by an investor or fund.
PRICE-EARNINGS RATIO (PE)
The number of times the price covers the earnings per security over a twelve-month period. Investors commonly use this ratio to measure the attractiveness of particular shares and to compare shares in one
company with those in another.
The different types of investments offered by entities such as companies and government authorities. Shares, debentures and bonds are examples of securities.
An equity or part ownership of a company.
Is the price of a single share of a company.
Thematic investing is a top-down investment approach that helps investors gain exposure to macroeconomic themes and trends through managed funds or baskets of related stocks.
A collection of shares based on an investment theme, market insight, or innovative trend.
Consolidation of investments under one administrative umbrella. Investments are wrapped into one single account.
Return on an investment that is received from the payment of a dividend expressed as a percentage.