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

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

Saxo

Summary:  The total value of the global equity market in 2023 was priced at USD 109 trillion (AUD 164 trillion) - and the Australian ASX represents a mere 1.5% of that figure. An ASX-only portfolio means every penny of your wealth is at risk of shocks and corrections facing the Australian market, so geographical diversification is prudent for both minimising risk and maximising long-term returns.


For Aussies, international share diversification is not a concept we often consider. We are 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). The valuation, or market capitalisation, of the ASX represents a mere 1.5% of that figure.

For comparison, the United Kingdom sits close to 2.9%, Japan at 5.4%, and the EU at 11.1%. The behemoth United States stock market (home of the famous NYSE and Nasdaq) is worth 42.5% or USD 46.3 trillion (AUD 70 trillion). The Australian equity market is a tiny fish swimming in a large and deep ocean. The astute investor knows how to navigate this ocean, and swim with the tides to maximise their returns.

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%

9.2%

ASX 200: the 200 largest AU
public companies.

Europe

109.85%

7.75%

Euro Stoxx 50: Europe’s top 50
public companies.

Japan

217.96%

12.36%

Nikkei 225: the 225 largest public
companies of Japan.

United States

214.25%

12.23%

S&P 500: the 500 largest US
public companies.

While the bestowal of attractive dividends has pushed the ASX 200’s 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.

SP Chart

If we now examine these returns accounting for fluctuations in the Australian dollar over this 10-year period, we observe the following:

Country

Total Return (accounting for FX)

Annualised Return (p.a.)

Australia

139.54%

9.13%

Europe

119.25%

8.17%

Japan

210.36%

11.99%

United States

243.21%

13.12%

To put this into perspective, an investment that earned you AUD 1 profit in the Australian market over this 10-year period could have earned you AUD 3.62 in the United States.

Diversification

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 risk across different regions, you reduce it. This phenomenon has become the gold standard for professional asset management.

BoID

How can investors diversify?

Stock picking is a difficult skill to master, yet at Saxo we are dedicated to giving our investors the best research available to make the most informed decisions and help you on your diversification journey. Stay up to date with international stock markets by following Saxo’s Head of Equities, Peter Garnry, here.

Check out some commonly traded international shares among Saxo’s Aussie clients (current as of 10 May 2024):

The top five most owned US stocks: Apple, Amazon, Microsoft, Tesla, and Google.

The top five most owned EUR-denominated stocks: LVMH Moet Hennessy Louis Vuitton (France), ASML Holding NV (Netherlands), Saipem (Italy), Vallourec (France), and Shell PLC (Netherlands).

The top five most owned Hong Kong stocks: Alibaba, Tencent, Meituan, JD.com Inc, and Hilong Holding Ltd.

For even greater diversification, investors can also look to international ETFs. The top five US-listed equity ETFs owned by Saxo’s Australian clients are: Vanguard S&P 500 ETF (VOO), Ark Innovation ETF (ARKK), Invesco QQQ Trust Series 1 ETF (QQQ), SPDR S&P 500 ETF Trust (SPY), and ARK Genomic Revolution ETF (ARKG).

At Saxo, we offer our clients the ability to open multiple currency “sub-accounts”, free of charge. Currency sub-accounts enable you to segment your portfolio into different regions, managing these portfolios separately and hence saving capital on FX conversion fees. To learn how to open a currency sub-account, please see here.

Understand the importance of currency fluctuations

Understanding and managing Foreign Exchange (FX) risk is important when investing abroad, as currency fluctuations can impact investment returns. Hedging is a tool that can mitigate currency risk and reduce the impact of currency fluctuations on returns. To broadly illustrate:

You invest AUD 10,000 in the European share market, purchasing EUR 6,500 worth of LVMH (with an exchange rate of AUD 1 = EUR 0.65). After three years, your investment doubles, and you sell the shares for EUR 13,000. When you convert the EUR back to AUD at the new exchange rate of AUD 1 = EUR 0.70, you end up with AUD 18,571.43 due to the appreciation of the Australian dollar over the three-year period. If the exchange rate had not moved over these three years, you would have instead taken home AUD 20,000.

To mitigate risk, savvy investors often consider Foreign Exchange Hedging on their investments. Hedging mitigates movements in foreign currency with the purpose of minimising or eliminating FX risk. To learn more, follow Head of FX Strategy Charu Chanana on how to hedge currency risk here.

New lower fees – trade international from USD 1

Trading international shares with us is also cheaper than ever before. For our most popular markets, see our brokerage charges below, or on the Saxo website here:

Market

Min Price / Commission (Classic tier)

United States

USD 1 / 0.08%

Japan

JPY 800 / 0.08%

Germany

France

United Kingdom

EUR 3 / 0.08%

EUR 2 / 0.08%

GBP 3 / 0.08%

Currency Conversion Fee

0.25%


Conclusion

The global share market is huge. Keeping all your wealth tied up in solely Australian equities may be risky, and could be costing you. Diversifying investments outside of Australia into global equity markets can potentially lead to higher long-term returns and reduced investment risk.

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, it’s a great time to get started.

For any further questions, please contact the Saxo Australia team at +61 2 8267 9000.

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