Is now the time to go international?

With some becoming bearish about the Australian sharemarket, and the Australian dollar (almost)stronger than ever at more tha US84¢, now may be the time to diversify out of Australian shares into international shares and other assets.
In other words, it might be time to think “global diversification” in portfolios, using the purchasing power of the strong dollar.

When you invest internationally, you use Australian dollars to buy overseas assets, so you want the dollar to be as strong as possible, to maximise its purchasing power.

Conversely, when you are selling the assets or receiving income from them, you are turning overseas currency into Australian dollars – you want the Australian dollar to be as weak as possible to receive as many Australian dollars as you can.

Why would you invest in global assets – shares and property – anyway? The main reason cited for investing in global shares is that the Australian stockmarket only makes up 2% of the value of the world’s stockmarkets. My response to that is so what? Sure the Australian market is small, but why should that send people investing internationally?

The real answer is diversification. An argument regularly used against investing in overseas markets is that many Australian companies generate earnings offshore. And it's true that among the top 300 companies, many blue-chips now have up to 40% of earnings coming from offshore, so why take on further international exposure?

There is some strength in this argument.

The answer is these companies are still listed on the Australian Stock Exchange and are affected by the Australian economic and political climate. So there is little macro investment diversification. What happens if something really bad occurs in Australia?

The long run returns from investing in both Australian and international shares have been very similar. However, the returns don’t come at the same time so there is an overall smoothing of the volatility in a portfolio.

But haven't global returns been poor?

At February 2007 the seven-year return for the MSCI World Index (dividends re-invested) was 1.73% a year. That’s terrible, so why would you invest in that asset class when cash is returning 6% or more?

Most of the poor performance from international shares has been due to currency movements. If you take out the currency movements, global sharemarkets have actually returned 10.45% a year over that same period.

Moreover, there is no reason to think that going forward global sharemarkets will not provide reasonable long-term investment returns. Indeed, the very reason that five-year returns have been generally poor – the rising Australian dollar – now provides an opportunity to use this strong Australian dollar and invest in international assets.

Let me know if you need more information or contact Adrian McMaster and his team who can help you diversify your portfolio now while the price is right.