The top global investment opportunities – The Australian Financial Review

Perpetual’s Garry Laurence says if investors want diversity into different industries they need to look overseas.

by Andrew Ramadge

This content is produced by The Australian Financial Review in commercial partnership with Perpetual.

Investing in foreign stocks could help Australians de-risk their share portfolio in the event of a cool-down in the housing market, says Melbourne fund manager Steve Melling.

Melling, managing director of Melling Capital Management, said that more Australians were starting to become interested in the idea of investing overseas thanks to strong international results, but many still needed to be educated about the benefits of overseas investment. 

“Interest does tend to follow historical performance, and overseas markets have been strong in recent times,” says Melling.   

“For many clients, it is a process of educating them about the benefits of investing globally – access to companies and industries which are simply not available in Australia. We tend to also focus discussion on the risks of constraining yourself to just one country, one currency and, for many investors, a high concentration in a few sectors such as financials and mining.”

Melling said there was a particularly strong risk for people who had their retirement savings concentrated in local bank shares, in the event that housing prices collapsed.

“If, for example, there was a significant downturn in the Australian housing market, then there will likely be a significant correlation … between the value of their house, the value of the bank shares they hold, the value of any credit funds or ‘hybrids’ they may hold and the value of the currency this is all priced in,” he said.

“These can all move down sharply at the same time and, depending on their employment status and industry, there is a good chance that their job security and income may be at risk in such an environment – when they can least afford it.

“Investing overseas on an unhedged basis can mitigate a lot of this concentration of risk – before you even start talking about the wider opportunity set available overseas.”

The traditionally parochial outlook of Australian investors has started to turn in recent times, with a significant upswing in the number of people holding foreign stocks. The latest Australian Investor Study from Deloitte and the ASX found that the proportion of Australians holding overseas shares doubled over the past five years – from 4 per cent in 2012 to 8 per cent this year.

Garry Laurence, global equities portfolio manager at Perpetual, said Australian investors had a traditional bias towards local stocks due in part to the challenges involved in looking abroad.

“I think the average retail investor prefers to stay close to home. There just isn’t enough infrastructure built up through retail stockbrokers to educate the public on the options that they have to invest globally,” he said.

“Our country is so far away from the rest of the world that people don’t have much exposure to other countries and their companies.

“Secondly, it’s more the way that the financial services industry has evolved in Australia. The expertise from stockbrokers is mainly on Australian equities, so they don’t get advised to invest in global opportunities.

“Having said that, there are plenty of people starting to see the opportunities, and obviously they know the big technology companies like Google and Apple.”

Laurence said IT was just one of the industries that was better represented on international exchanges than in Australia, with others including consumer goods and healthcare – which tended to be over-valued locally due to the lack of options .

“If people want to get some exposure to healthcare in Australia, there’s only a handful of stocks they can invest in. The valuations get pushed higher, whereas if you look overseas there’s a huge amount of healthcare stocks available in a large number of countries,” he said.

“Australia [has also] lost a lot of its consumer staples sector, so a lot of the consumer stocks that were around five to ten years ago have been taken over by offshore companies.

“If you want diversity into different industries you do need to look overseas.”

Laurence said his advice for retail investors looking abroad for the first time was to start with the two main US exchanges, NYSE and NASDAQ, as well as the Hong Kong stock exchange and the DAX in Germany – but to be aware of the risks.

“Obviously they’re not as close to the companies as they would be in Australia, so if you are investing directly you need to do a lot more research,” he said.

“If you’re a retail investor and investing offshore, I always recommend people look at funds because you’ve got professional investors who have the resources to travel overseas and do due diligence on the companies.

“The other issue is the volatility of currencies which will affect your returns in Australian dollars. However, it can affect your returns positively, as we’ve seen recently as the Australian dollar depreciates.”

As for Melling, his advice is for investors to take their time and make sensible decisions, no matter which region it is in.

“Individual companies, industries or even entire countries and regions can each have their time in the sun, or conversely can get cheap enough to provide good investment opportunities from time to time, for the patient and considered investor.”

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