It's common knowledge that geographic diversification in your portfolio is critical. But one common misconception is that achieving it means investing on overseas exchanges. And historically, there was truth to that. Geographic location was a good indicator of a stock's primary market exposure. But today, using domicile alone can be deceiving.
Here's why earnings diversity is critical – and how you can achieve it without leaving the ASX.
It's likely your risks are already concentrated in Australia
Most Australian investors instinctively look to the ASX for their first and often biggest investments. It feels familiar, you're dealing in Australian dollars, you may avoid some additional tax filing requirements, and your money stays in Australia's highly regulated environment. And that's before we even get into the benefits of Australia's franking credits system.
But Australia is a small pond. It makes up less than 2% of the global equity market and only 0.33% of the world's population, so you risk putting all your eggs in one very small basket.
Additionally, it's likely that you're heavily exposed to the Australian economy before you start your portfolio. Your job, your salary, your house and most of your large assets probably sit here. And for most Australians, superannuation is tilted toward domestic shares. It means you're already flying in one weather system, and if a storm hits the Australian economy, you're exposed to it on many fronts.
The good news is that you can achieve global exposure without leaving the ASX.
Follow the money on the ASX
Where a company is located is largely irrelevant today. In fact, you could build a portfolio across the ASX, NASDAQ, Nikkei and FTSE, assuming you have achieved diversification, and still be disproportionately invested in one region because that's where your investments make most of their revenue.
Instead of looking for overseas-based companies to achieve this, you can follow the money and stay on the ASX, by considering:
- Where does the company earn most of its income?
- Where are the majority of its customers based?
- What currency does it transact in?
It's these factors that determine its exposure to economic, social, regulatory and geopolitical – and, therefore, your geographic diversification.
What ASX shares can I invest in to gain global exposure?
You can build geographic diversity on the ASX with some solid performers. Here are three that are worth a look to get you started:
- Amcor PLC (ASX: AMC) The packaging giant makes most of its money in the US (50%), followed by Western Europe (28%). In fact, Australia and New Zealand combined account for only 1% of its revenue.
- Codan Ltd (ASX: CDA): Codan makes most of its communications technology and metal detecting equipment sales across North America (40%), Europe and the Middle East (29%) and Africa (18%).
- Brambles Ltd (ASX: BXB): This large supply chain logistics player brings most of its sales revenue from the Americas (55%) and Europe and the Middle East (37%).
Foolish bottom line
When your income, assets and super are already tied to Australia, doubling down by investing purely in Australian‑centric companies can leave you over-exposed to one economic climate. By focusing on earnings geography rather than company location, you open your portfolio to the other 98% of global market opportunity, all without leaving the relative comfort of the ASX.
