It’s easy to understand the benefit of investing in Australian equities given the long history of dividends, tax benefits (via franking credits) and our familiarity with household names including the banks, Telstra, Wesfarmers, AGL etc. which have performed strongly in recent years. Often overlooked is the importance of going beyond our shores to reduce investment risk so we refresh a few of the key reasons for doing so below:
- Australia comprises just 3% of the world economy. The World’s largest economies are the US, the European Union and China which make up 60%.
- Australia’s largest company (by market capitalisation) is the Commonwealth Bank ($147 billion). The World’s largest company is Apple ($752 billion) which equals FIVE Commonwealth Banks.
- The top 10 Australian listed companies represents 46% of the Australian equity market and the top 300 companies are dominated by banks (40%) and resources (15%). As a result the Australian equity market is highly dependent on a few key sectors being property (and indirectly Mums & Dads as consumers and in more recent times foreign investment) and resources (linked to global commodity prices).
- In contrast the top 10 largest international businesses represent 11% of the world equity market and the top 1,600 companies are 17% banks, 16% technology, 13% retail and 12% healthcare to name a few.
- Whilst some argue Australian companies provide sufficient international exposure on balance the record of Australian companies going abroad is poor with many of our largest companies failing and burning significant amounts of shareholder wealth. There are of course exceptions including CSL and Cochlear which have world class competitive advantages.
- Innovation and technology (sometimes referred to as digital disruption) has changed the composition of the world’s top 5 largest companies which in just 4 years are now all technology based enterprises.
- $10,000 invested into only Australian equities in 1980 would be worth $552,600 today. The same $10,000 invested 60% in Australian equities and 40% in international equities would be worth $781,700 today. <Assumes Australian equities are S&P/ASX300 & international S&P500 with dividends reinvested>