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Introduction This is particularly important as the Australian equity market accounts for less than 1.5% of world equity markets in aggregate. However, there are other - less well known - but equally important reasons for investors to consider having exposure to overseas equities; this article explores some of these. Globalisation
- An Unstoppable Trend. Indeed, this is an ongoing phenomenom as witnessed by the number of mergers / acquisition in the US and Europe (e.g. Ford & Volvo, ATT & Media One, Olivettii & Telecom Italia, Banque National de Paris & Paribas & Societe Generale). In effect, the big multinational companies will continue to get bigger while smaller domestically focused companies will struggle to compete. Similarly, the overseas expansionary moves by larger Australian companies such as, Brambles, News Corporation and James Hardie in recent years is recognition that the size of the Australian marketplace with only 19 million consumers limits profit growth. At a political level, the forces of globalisation are well illustrated by the formation of EMU and the introduction of the Euro with 11 countries integrating their respective economies. Ageing
of the Population - A Boom for World Equity Markets
! Indeed, in Japan there are now more people aged over 65 years that there are under 15 years of age (16.5% to 14.9%). Similarly, in Europe it is predicted that by 2025 the ratio of employed persons to pensioners will drop from the current 6:1 to only 3:1! In many countries, old age pensions are presently funded from recurrent tax revenue; it is therefore apparent that with the forecast reducing taxpayer base there must be moves by governments to self funded retirement schemes, such as Australia's Superannuation Guarantee Charge and USA's 401K plans. The investment implication from these two factors, an ageing population and a need for self funded retirement is that there must be both an increase in savings and an increased exposure to growth assets - a double positive for world equity markets! For instance, the current capital growth : income asset allocation in European pension funds is 20-30% equities : 70-80% fixed interest - the opposite of that in Australia ! Clearly, this asset allocation mix must reverse within the medium term if the objective of self funded pensions is to be met, with European equity markets receiving a very large "free kick" as a result. Global
Brands - Product Market Dominance As these companies are listed on various exchanges around the world, the only means available for an Australian domiciled investor to access these companies and their superior earnings growth outlook is by investing in overseas equities either directly or through a managed fund. For an Australian investor this is particularly prescient as many of our "icon brands" have been bought by foreign multinationals who are not listed on the Australian equity market. For example, Arnotts biscuits (owned by the US based Campbell Soup Corporation); Four and Twenty meat pies, Birdseye fish fingers and Edgell frozen foods (owned by Simplot Inc of the US), Vegemite (owned by Kraft Foods of the US) and Tooheys Draught / Four XXX Bitter / Swan Lager (owned by Lion Nathan Ltd of New Zealand). In comparison, an overview of the Australian equity market highlights a distinct lack of listed companies with truly global brands (the possible exception being News Corporation through its Twentieth Century Fox film and television subsidiary) A possible reason for this lack of Australian based "global companies" is the local regulatory environment which inhibits the creation of large, globally competitive companies. Hence, only investing in Australian equities carries a significant risk - missing the few companies that will globally dominate their respective industry sectors ! Asset / Liability Matching - Exploding the Myth that all your Liabilities are Australian Dollar denominated Any astute investor will always try to match their assets against their liabilities either implicitly or explicitly. Overseas equity investment is an important part of this process as each Australian consumer whether knowingly or not has an overseas component in their liability structure through either the purchase of foreign sourced goods and services, or those provided locally by a foreign domiciled company. In essence, there are two forms of asset / liability matching for an Australian consumer / investor:
Clearly,
we all have some currency exposure in our expenditure
- if we replace the Michelin tyres on our car
we are implicitly exposed to the exchange rate
as they are not manufactured in Australia. The
reason for saving money and accumulating assets
is of course to meet future expenses. As a significant
percentage of money we spend is on goods made
outside Australia, an investor needs to hold overseas
assets such as international equities to help
match these liabilities. Owning say an investment
flat or local shares will not necessarily do this.
Conclusion - The Obvious !
In a continuously evolving global economy dominated
by large multinational companies with global brands,
a personal consumption pattern that is implicitly
ever increasingly exposed to foreign exchange
fluctuations can you, as a consumer let alone
an investor, really afford not to be invested
in overseas equities ?
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