Offshore investing: The game changes

A sudden swoon on the NASDAQ may force Australian offshore investors back to the drawing board.

Summary: Australians are buying international shares in record numbers and tech is a favourite, but recent losses from marquee stocks have many asking what the benefits are. As the meteoric growth of companies like Amazon slow, it’s worth keeping in mind that analysts still see growth in the data flow and tech sectors in the long term – but that there are also alternatives for US exposure that don’t involve picking individual companies alone. 

Key take out: If investors want international exposure without the pressure of individual stock picking, US based ETFs available through online brokerage accounts might be a good alternative. Hits to US tech stocks so far this year are landing just as Australian investors get a taste for international trading.

Key beneficiaries: General investors. Category: Shares.

Online brokerage firms are reporting high traffic from first time Australian offshore investors wanting get started in global shares. CBA’s Commsec told Eureka Report that the number of individuals trading international shares through their online accounts has doubled in the last six months, and tech is a favourite theme - though you might be questioning your timing if you just got into the game only to see the major us technology stocks contribute to a 15 per cent hit to the overall Nasdaq since the start of this year.

Australian investors have been particularly attracted towards the so-called fangs - Facebook, Amazon,  Netflix and Google (now operating under its parent company - Alphabet). Among these stocks there has been some resilience, nevertheless favourites such as Amazon are down 16 per cent since the new year.

What's more, nobody likes the jolts but everyone needs the global exposure. so how should Australian investors approach us shares if the market darlings are faltering - is it possible to ride out the waves?

Tech stocks have been powering US markets

As you can see from the below composite breakdowns, technology stocks make around half of the Nasdaq composite index and 20.4 per cent of the broader S&P500:

Nasdaq 100 index breakdown.

S&P500 sector breakdown.

Compare those figures to exposure to the 47 per cent weighting that the ASX has to financials and perhaps another 10 per cent or so in the mining majors:

ASX200 sector breakdown. Source: Bloomberg.

The internet of things is still developing

Is it too early to change tack in the USA? Planning a portfolio around the recent declines is made difficult by the changing face of technology stocks and the significant returns posted in the last year. There might have been recent dips, but the last 12 months have seen Facebook gain 40 per cent, Amazon 54 per cent, Netflix 63 per cent and Google 30 per cent.

Outside of these stocks, there is still a belief that the “internet of things” has significant room to develop across the globe.

A recent report on global information flows from McKinsey highlights that the power of data flows, (including the kind of information passed through tech companies like Google and Facebook) has had a significant impact on global GDP and will soon be worth more than the global goods trade. with room to amplify this growth as emerging economies embrace new technologies; there is clearly room for long-term growth in the sector, regardless of individual share prices. 

It’s also up for debate whether the dip in key stocks is here to stay, or whether this is a rebalancing given the high-speed growth and inflated p/e ratios now on offer:

Advisers suggest that you have to ask why you’re buying in the first place – and this could come down to the fact that there’s no access to sectors of interest on the ASX. “Our customers are searching specifically for individual names in global brands,” says Nathan Walsh, General Manager of Self-directed Wealth at nabtrade. “The top three sectors of interest are tech, consumer and health care – these are attractive because they are simply not available on the ASX.”

Using ETFs to pick your sector

As Barron’s reports (read more here: Resurrection of the value investor), US market volatility has seen steady outflows from actively managed funds and individual shares into ETF structures. Moreover, Barron’s puts forward the view that US stock investors may be moving away from growth stocks such as the FANGS and back to traditional industrial and financial stocks. Indeed it seems  many US analysts note that value stocks exist, but that they take significant time to pick up in this market, and patience is needed to see returns. In this environment ETFs offer a useful entry into a changing us market.

The flow into ETFs is also being borne out in Australia, both for local and international exchange-traded funds – as a Commsec spokesperson told Eureka Report: “the sharpest drops in the All Ords happened in august [2015] and January [2016], which coincides with sharp increases in heavy ETF trading and buying.”

"We have seen a really strong take-up for ETFs in the last 12 months across markets," says Walsh of nabtrade. "These have allowed investors to use strategies that you can't take advantage of in Australia, because there are so many more funds available on the us market."

While exchange-traded funds have been criticised for exposing investors to weaker parts of overall markets, a fund that gives exposure to just a small part of the index might let you take advantage of areas that are outperforming. For example, the iShares US Consumer Goods ETF, which tracks the US Dow Jones consumer goods index, is up 2.47 per cent year to date – compared with the iShares US Technology ETF, down 2.08 per cent for the same period.

iShares U.S .Consumer Goods ETF performance YTD.

iShares U.S. Technology ETF performance YTD.

While ETFs that track entire indexes can be exposed to some sectors with weakness, US funds that hug a particular part of an underlying benchmark could be a useful addition to a portfolio if an investor has a strong belief in the upcoming strength of a part of the market and want the wins just from that section.

Managed funds as an alternative

If you’re still looking for big brand names but don’t want to pick them individually, another option is to find an Australian fund manager with exposure to international shares – this can give you exposure to all global markets, as well as delegating the task of watching stocks you are not familiar with to a more experienced fund manager. One option would be a fund like Magellan Global (you can read Kirstie Spicer’s recent articles on the fund here: ER fund manager series: Magellan Global) – the management team has delivered 11.28 per cent per annum since inception, holding big brand consumer and lifestyle stocks and the management team is constantly sifting for underpriced opportunities.

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