International Exposure on the ASX

I forget sometimes, tearing through reports and numbers is not everyone’s cup of tea.

Yet most nights I’m usually in bed doing just that. I know I’m not the only one. Some people are genuinely interested in learning about new businesses.

For others, nothing could ruin their night more. Looking over numbers and translating financial jargon is an effective sedative on a restless night.

Almost everyone, however, understands the importance of investing. Why put money in a savings account when you can earn far higher returns in the stock market?

For those that can’t bear the reports, passive investing is an option. This means you’d buy an index fund, which tracks an index like the ASX 200 or All Ordinaries. Alternatively, you’d buy an exchange traded fund (ETF), which tracks a basket of assets.

The returns aren’t the same as picking an individual investment. But it’s an attractive option for those without the time or desire to find extremely profitable stocks.

But because of the way the Aussie market is structured, most index investors would have been better off in a savings account.

Let me explain why…

Don’t be passive down under

Earning a decent return on your cash by doing little to no work — no wonder why ETFs are so popular.

All you have to do is buy a fund and forget about it.

For index investors, returns over the short-term have been decent. Had you bought the ASX 200 or All Ordinaries in 2016, you’d have made more than 21% on your cash. 

It’s not the best result. But remember you did little to no work to get this result. Beats the 3% interest you’d get in a savings account.

Yet this isn’t always the case.

Had you bought the ASX 200 back in 2010, you’d only receive an additional 4% return. Assuming you could have earnt 3% annual interest over the same time, you’d be better off in the savings account.

MM-25-05-18-1

Source: Money Morning

[Click to open new window]

Not only has performance from the ASX 200 been terrible in absolute terms. It’s been even worse on relative terms.

Over the same time, indices in America, Japan, Germany and New Zealand have demolished Aussie returns.

Morning Money 25-05-18-2

Source: Google Finance

[Click to open new window]

Why have we lagged the rest of the world?

Our market is far too top heavy. The 20 largest stocks represent 54% of the ASX 200 index. And of those 20 stocks, 30% is made up of financials.

That means if the banks do poorly (or the materials sector for that matter), then the ASX 200 does poorly.

It’s a different story for the S&P 500 for example. No sector makes up more than 5% of the index, except for banks, which make up 5.08% of the index.

Even the four largest stocks, which are some of the largest in the world, make up about 12% of the index. The four largest Aussie stocks make up around 23% of the ASX 200.

Considering this, it wouldn’t hurt to buy investments with international exposure.

Go where the growth is

In emerging countries like China, India and Brazil, there’s plenty of growth for investors.

Buying investments with exposure to emerging markets might not just improve your results. It could literally change your wealth!

Focusing on China earlier this week, South China Morning Post wrote:

‘…(China’s) story has been largely beyond foreign investors, whose holdings account for less than 2 per cent of China’s stock and bond markets. But this is starting to change, and in a big way.

The opening up of the mainland’s capital markets has sped up markedly in recent years, most prominently with a pair of “stock connects” linking bourses in Shanghai and Shenzhen with the international finance hub in Hong Kong.

‘…Another major milestone comes on June 1, when index provider MSCI includes more than 200 big-cap mainland-listed stocks – also known as A shares – in its Emerging Markets Index.

The inclusion shows China is becoming accepted into global capital markets. It could also prompt well over half a trillion US dollars to pour into Chinese stocks in the next five to 10 years, as institutional investors adjust index-linked portfolios to MSCI’s change.

Clearly, investors – be they European hedge funds, pension funds in Australia, sovereign wealth funds from Asia, or ordinary savers around the world – will need to look at what might be a once-in-a-generation opportunity.

China’s equity market is the world’s second-biggest, with more than 3,000 A shares listed in blue-chip-heavy Shanghai and tech-centric Shenzhen valued at about US$8.7 trillion last year.

And don’t think you can’t get the same exposure right here on the ASX. Yes, our market is top heavy. But toward the bottom end, there are amazing businesses with exposure to emerging markets.

This is exactly why I launched my brand new advisory service Wealth Eruption. I want to help everyday Aussies find small gems in the market that have massive potential.

Some of the stocks may have exposure to growing markets like China, Singapore and Indonesia.

I’m finding so many opportunities right here on the ASX, it’s sometimes tough to pick only one to write about each month.

If you want to find out more about my service, you can do so here.

Your friend,

Harje Ronngard,
Editor, Money Morning


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


Leave a Reply

Your email address will not be published. Required fields are marked *

Money Morning Australia