Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 330

Two big reasons to go global

Australian equities have been a star long-term performer -- 27 years without a recession has that effect -- and our local market is ripe with success stories. Australian investors aren’t blind to that success either as the latest ASX Investor Study shows a stout 31% of Australian adults hold listed shares.

As great a ride as it has been, though, Australia is far from the only long-term winner for equity investors. In fact, even though the Australian economy punches above its weight, the whole of the Australian equity market only comprises about 2% of the world’s list equities.

Australian equity market is sector-specific

You might think that a majority of Australian investors who hold listed shares would be invested overseas as well, given Aussies own exchange-listed investments at a much higher rate than peers like the US (14%), UK (18%), and New Zealand (23%). However, less than 8% of Australian adults (up from 5% in 2014) hold listed overseas shares even though overseas equities make up 98% of the global market.

The international investing blindspot costs Australian investors in two big ways.

The first is an opportunity cost around world-leading companies. Yes, Australia is home to some global champions, but the vast majority of iconic global companies are not listed here. Visa, Amazon, and Booking, for example, all have big footprints in Australia but are not locally listed. Just the state of California alone has more companies with market capitalisations above US$100 billion (19) than the whole of Australia (5).

The simple reality is that when a market makes up only 1/50th of the world’s equity market, the odds of backing a breakout winner in that market get very long (more on that later). The odds get longer still for investors only focused on the big end of town.

Massive differences in Australia and Global

Consider the sector makeup of Australia’s S&P/ASX 200:

A stout 32.4% of the benchmark is in financials, which is mostly comprised of a handful of mature, slow-growing banks. The next largest bucket, materials, does have some winners to point to, namely Fortescue, but for the most part materials is a capital-hungry sector known for historically-poor returns on capital.

Now contrast that with the makeup of the MSCI All Country World Index:

Note the huge differences. Materials is more than three times as heavy on the ASX. Information technology (IT) is seven times as large for the MSCI All Country World. We could point to plenty of fabulous IT flops, however, it’s also the sector that is home to the world’s most disruptive companies and where value can accrue the fastest.

For example, a recent study by Kantar of the world’s most valuable brands found that three of the top 10 were IT companies and another four were classified as IT until they were reclassified last year as part of a broader reclassification.

The massive gap between the sectors and styles of companies in Australia and offshore leads to a second key appeal of investing offshore: diversification.

Unfortunately, far few too many investors are genuinely diversified. The aforementioned ASX Investor Survey notes that 40% of investors say they do not have diversified portfolios while another 46% say they do but only hold an average of 2.7 investment products.

Investing offshore is a direct way to improve a portfolio’s diversification. A recent study by Vanguard found that the Australian equity market only has a 0.58 correlation to international equity markets, which provides a lot of diversification bang for the buck. Indeed, the same study found that increasing an international equity allocation to around 60% could reduce average annualised portfolio volatility by around 20%.

A handful of global stock ideas

And so the appeal of global investing is quite clear. What’s less clear is how to tackle global investing. The MSCI All Country World Index has more than 2,800 constituents, for example, spanning 23 developed markets and 26 emerging markets. It’s a lot of ground to cover for, say, a punter with a day job.

Fortunately, my day job is to sift through those very markets, so in the spirit of helping investors here are a couple of examples of the opportunities available overseas. These aren’t recommendations -- do your own due diligence -- but we think they’re worth studying.

Let’s start with Facebook. What most readers may not realise is that for all the bad press the company has received it is still highly profitable and growing at healthy rates. The number of daily active users on the core Facebook platform grew 8% year on year to 1.6 billion through the second quarter of 2019 with revenue growing 32% in constant currency terms.

The business is also growing strongly outside of the flagship platform -- each of Instagram, WhatsApp, and Messenger has more than 1 billion monthly active users -- and is cashed up with more than 7% of the company’s market capitalisation held in net cash. The long spate of fines and bad press aren’t behind the company yet and there remains an outside risk the US government might disentangle Facebook’s platforms. However, we think there is a lot to like and the regulatory risk is accounted for given the shares are only selling for around 22 times consensus forward earnings estimates.

An interesting company that would not be on the radar of many Australians is MercadoLibre. The business is listed in the United States, however, it is present in 18 countries and hosts the largest online commerce and payments ecosystem in Latin America. The company has more than 292 million registered users and close to 2 million items are sold on its website each day. The company’s eBay-like marketplace has a classic network effect, bringing buyers and sellers together, and is growing at strong rates. We think the payments business is the crown jewel, with the year-on-year growth in total payment transactions accelerating from 64% to 112% in the past year.

The shares are spicy. The valuation is not conventionally cheap, the business is underearning today because it is investing heavily in strengthening its logistics network and broadening the reach of its marketplace and payments networks. Its home country of Argentina is not exactly the classic picture of political stability. Nonetheless, we admire management’s willingness to reinvest in the business with a long-term view and think the company, and particularly its payments business, could grow at high rates for a long time to come.

 

Joe Magyer is the Chief Investment Officer of Lakehouse Capital, a sponsor of Firstlinks. Joe owns shares of Visa, Amazon, Booking, and Facebook, each of which is a holding of the Lakehouse Global Growth Fund. The Lakehouse Global Growth Fund also owns shares of MercadoLibre. This article contains general investment advice only (under AFSL 400691) and has been prepared without taking account of the reader’s financial situation. 

Lakehouse Capital is a growth-focused, high-conviction boutique seeking long-term, asymmetric opportunities. Lakehouse is the investment manager of the Lakehouse Small Companies Fund and the Lakehouse Global Growth Fund.

For more articles and papers by Lakehouse Capital, please click here.

 

RELATED ARTICLES

Three areas SMSFs should consider outsourcing

ATO confirms SMSF global allocation “strongly understated”

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Strategy

$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Strategy

Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.