The hidden risks lurking in your portfolio

Central banks in developing countries are being forced to raise interest rates to defend the sell-off in their currencies. This is a last resort, as it will negatively impact already weak growth rates and further damage the economies. Think that doesn’t affect you?

Think again. Investing in broad market indices or individual stocks may give rise to unexpected geographic exposures — 43% of revenues of companies represented in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) are from outside Australia.

According to fund manager Capital Group, “using a company’s locale as a good proxy for where it does business is increasingly out of step with today’s global economy”. In making allocations between “local” and international shares, investors should consider the following examples of overseas exposure for major Australian multinationals.

Twenty-First Century Fox (ASX: FOX) leads the field with a 100% exposure to international revenues, while Brambles  (ASX: BXB) and Amcor  (ASX: AMC) have 89% and 84% respectively.

Healthcare is well represented, with a large percentage of sales outside of Australia and New Zealand. ResMed (ASX: RMD) has 97%, Ansell (ASX: ANN) 89%, CSL  (ASX: CSL) 87%, Cochlear (ASX: COH) 83% and Sonic Healthcare (ASX: SHL) 51%.

The overseas exposures increase when looking at the example of the top 200 material companies.  The collective economic exposures, in terms of percentage of revenues derived outside Australia, is more than 88%.

In terms of the overseas currency gyrations, the Aussie dollar is relatively calm. Even so a 10% change in the Aussie dollar results in a 35% change in forecast net profit after tax for Newcrest Mining (ASX: NCM) and 11% for Rio Tinto (ASX: RIO). Imagine the effect of the massive devaluations in emerging economies on forecast profits.

When investing in international shares there is another fact to consider. In the U.K. for example, 77% of the revenue generated by companies represented in the FTSE 100, are derived from outside the U.K. For the S&P 500 (SNPINDEX: ^GSPC) in the United States, the same revenue figure is 40%.

Foolish takeaway  

Investors need to concentrate on geographical exposure, instead of looking at a company’s country of domicile, to reach a meaningful conclusion on asset allocation. If you are contemplating increasing your allocation to international shares, it’s important to first assess the existing international exposure for your Australian shares.

In summary, being aware your company’s overseas operations is important, as lurking within your existing portfolio may be exposures to unexpected and unwanted economies.


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