International Investing: look beyond the usual suspects

Australian investors are increasingly seeking to invest in international markets – with the mining bust and a weaker Australian dollar contributing to the desire to look offshore. With that in mind, investors looking to invest globally should be aware of the potential added benefits that arise from looking beyond the “usual suspects” when seeking international exposure.

Australian investors are increasingly seeking to invest in international markets – with the mining bust and a weaker Australian dollar contributing to the desire to look offshore. With that in mind, investors looking to invest globally should be aware of the potential added benefits that arise from looking beyond the “usual suspects” when seeking international exposure.

suspects

 

The Case for International Diversification is Strong

The switch from domestic to international equities has been one of the key investment themes during the last couple of years.  This has been driven by 3 key investment objectives:

  1. Diversification: Access to global economies and sectors different to those available in Australia
  2. Performance: Exposure to global countries or sectors with different investment fundamentals than Australia’s, suggesting better potential performance at various time during market cycles
  3. Currency: Exposure to assets denominated in currencies that are expected to appreciate in value relative to the A$

As might be expected, much of the flow into international equities by Australian investors has been into investments related to the well known international equity benchmarks such as the US S&P 500 or the MSCI World Index.  The chart below shows the S&P 500 Index has outperformed Australia’s S&P/ASX 200 Index since the peak in commodity prices in 2011.

S&P
Returns are in Australian dollars. Past Performance is not an indication of future performance.

Don’t Forget the NASDAQ-100

When looking at international equities investing, Australian investors should also appreciate that other international benchmarks are available that can potentially offer even better diversification and the potential for enhanced returns when compared to the S&P 500 – such as the NASDAQ-100 Index.  In terms of global market capitalisation, the Nasdaq exchange is second only to that of the New York Stock Exchange, and the Nasdaq Index stands alongside the S&P 500 and Dow Jones as one of the three most widely quoted indices in the United States.

Why get exposure to the NASDAQ-100 Index? Because compared to the S&P 500 and World MSCI, it offers even greater exposure to a number of currently strong-performing global sectors such as technology, healthcare and retailing.  In addition, it offers lower exposure to the more struggling sectors such as materials, energy, finance and utilities.  Indeed, as seen in the chart below, the NASDAQ-100 Index has outperformed even the strongly rising S&P 500 index in recent years.

nasdaq
Returns are in Australian dollars. Past Performance is not an indication of future performance.

In addition, it is apparent that the NASDAQ-100’s out-performance has not been due to inflated valuations – as was the case during the dotcom bubble 15 years ago. Instead, as seen in the chart below, it has reflected relatively strong underlying earnings growth driven by such well-known companies as Apple, Google, Facebook and Amazon.

earnings

Indeed, the NASDAQ-100 is still trading at just under 20 times trailing earnings, which is below its long-run average (even excluding the bubble years between between 1999 and 2002) of 23 times.

What’s more, the NASDAQ-100’s low exposure to resources and financials and relatively high exposure to technology and healthcare also means it offers particularly strong sector diversification for Australian investors.   As an example, the table below compares the sector allocation outcomes of blending a 70% S&P/ASX 200 portfolio with a 30% allocation to either the S&P 500, the MSCI World Index, or the NASDAQ-100 Index.

nasdaq
Relative to the S&P 500 or the MSCI World Index, blending the S&P/ASX 200 with the NASDAQ-100 provides:

• The highest blended exposure to the currently perceived “growth” areas of IT, Consumer and Healthcare
• The lowest blended exposure to the currently perceived “lower growth” areas of Materials, Energy, Financial and Utilities

Conclusion

Australian investors may have a number of reasons to consider investing offshore. If these reasons predominantly include:

  • Diversification and exposure to sectors not readily available in Australia;
  • Belief in improved performance from a returns perspective from global equities;
  • Belief that the fundamentals are better(such as earnings growth and valuation) in global equities,

then it may well pay to look beyond the usual suspects. Indeed, the NASDAQ-100 index has beaten S&P 500 (and MSCI World) on all 3 counts over the last 5 years, and, in my view, its relative performance outlook and diversification benefits still appear compelling from the perspective of an Australian investor.

Investors wishing to gain international exposure to the NASDAQ-100 can invest in the BetaShares NASDAQ-100 ETF which is now trading on the ASX under ticker NDQ.

NDQ aims to track the performance of the NASDAQ-100 Index, before fees and expenses. The Index provides investors with exposure to the performance of the 100 largest non-financial securities listed on the NASDAQ stock market, by market capitalisation. The Index contains category defining companies across major industry groups such as technology, telecommunications and retail. NDQ gives Australian investors the chance to get exposure to many of the world’s most innovative companies that continue to revolutionise our everyday lives including Apple, Facebook, Amazon and Google.

- See more at: http://www.betasharesblog.com.au/international-investing-look-beyond-the-usual-suspects/#more-2340

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