Why now is a great time to invest abroad

Over the past few weeks, Nathan, James and myself have been working on a special report about international investment opportunities. The analysis will be available in a fortnight and will highlight about a dozen potentially cheap, predominantly blue-chip stocks listed in the US, UK and Europe.

In addition to highlighting individual opportunities, the report will include a section on choosing an international broker – one of our moles is busy opening accounts with various providers to test the user-friendliness of their process.

The special report takes care of the ‘what’ and the ‘how’ of international investing. But it only briefly touches on the ‘why’. This feature is intended to fill that gap.

We’ll get to the most important ‘whys’ in a moment, but first let’s consider the more conventional selling points, which aren’t without merit.

‘Representing just 2% of the world’s stockmarket capitalisation,’ goes the marketing spiel, ‘those investing only in Australian stocks are missing out on 98% of the world’s opportunities.’

We think there’s much to be said for missing out on 98% of the world’s blow-ups, bankruptcies and frauds. A home ground advantage is not to be sneezed at either. But there is some truth to the self-serving sales pitch.

Global brands

Australia lacks global brands and many important industries are simply non-existent here. There is no Australian version of McDonald’s or The Coca-Cola Company (Amatil doesn’t quite fit the bill). Try finding the equivalent of consumer goods giants Proctor & Gamble and Johnson & Johnson, or spirits companies Diageo and Pernod Ricard. Australia doesn’t even have a major listed beer brewer anymore.

You can forget about investing in an Australian Microsoft, Google or Apple, or a local pharmaceuticals giant for that matter. And if you’re searching for the Australian Berkshire Hathaway, we suggest you find a new hobby.

If you can purchase shares in such companies at reasonable prices, then you’re buying a good investment that also offers genuine diversifying power for the Australian investor. And diversifying investments so your portfolio is not too reliant on any one currency, national economic cycle, industry type, government policy, commodity price or interest rate cycle makes sense.

Another reason often given for investing overseas is that it has never been easier. And there is truth to this as well – although, as is often the case, the US appears determined to head the other way.

You’ll still have to fill out a W-8BEN form (a Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding) every few years, but lower brokerage rates and more user-friendly broking choices should provide some encouragement. We'll have more details and other helpful hints in the special report.

Let’s now address the more compelling ‘whys’.

Unusual juncture

Watch footage of any old political speech, management talk or denouement from a Federal Reserve chairman or Reserve Bank of Australia (RBA) governor and they will probably have one thing in common – a belief that now, whenever that was, was a particularly crucial, unique or dangerous point in time. Looking back, though, the tension or excitement surrounding 1983, 1995 or 2003 seems unjustified.

So we do need to guard against this bias. Betting against Australia over the very long sweep of time has proven a mistake, although it has been a good call for some pretty long periods.

Over the past few years the analytical team at Intelligent Investor have become much more interested in foreign diversification. That's partly a result of the good opportunities appearing overseas – about which we'll say more in the special report – but it also reflects some concerns on the home front.

Great booms often lead to great busts, and while there is no certainty of problems to come in Australia, it's easy to see the potential for trouble.

Twelve months ago, RBA governor Glenn Stevens warned us that Australia’s terms of trade, a measure of the respective price level of exports and imports, was 65% above the average level for the 20^th century, mostly because of record prices for commodities.

He went on to say that ‘with the terms of trade at their current level, Australia’s nominal GDP is about 13 per cent higher … than it would have been had the terms of trade been at their 100-year average level’.

Now the ‘stronger for longer’ crowd might be proven right, although recent commodity price falls hint otherwise. But if our terms of trade happen to revert to their long-term mean over, say, a four-year period, our economy will be running into a -3% annual GDP headwind for four tortuous years.

The result is likely to be a grinding recession. And that's just if our terms of trade fell back to their long-term mean. The result could be even worse if they fell below trend, as often happens when booms turn to bust.

And what if a slowdown in Chinese infrastructure investment – the likely cause of any contraction in the terms of trade – also caused commodity export volumes to tank?

What if all this economic turmoil also caused a nationwide reassessment of our expensive housing market, or still excessive levels of personal debt? With just a little imagination, Australia could go from being the envy of the western world to being an underperformer in barely a shuffle.

These aren't predictions – we strongly favour preparation (for all possible outcomes) over prediction – but in this environment a little fear might not go astray. Despite the more difficult economy of the past 12 months, many investors remain extremely complacent. If Australia’s economic tailwinds turn into headwinds, it is going to hurt.

Opportunities elsewhere

If we'd had these concerns 13 years ago, when a US dollar cost nearly two Australian dollars and blue chip stocks in the US, UK and Europe where trading on stratospheric multiples, the alternatives would have been limited. Cash or term deposits for a decent chunk of your portfolio perhaps, as insurance against any storm.

But very high quality stocks in other parts of the world are trading at very reasonable prices today. While Australian blue chips are cheaper than they were five years ago, they’re not outcasts. Many big US and European stocks are too, and they’re tied to different economic cycles than local stocks.

Of course, these economies have their own problems, but in many cases their stock prices appear to more than compensate for that. It’s doubly attractive that cheap, high quality international stocks can be bought with your still expensive Australian dollars.

So you don’t need to go on the defensive to get protection against economic calamity in Australia. Given some of the unique and perhaps underappreciated risks at home, and attractive opportunities currently available elsewhere in the world, this is one of those times when investing part of your nest egg overseas is likely to reduce risk and increase your portfolio’s expected long-term returns.