A new report from Kerry Craig, Global Market Strategist at J.P. Morgan Asset Management has reinforced the importance of targeting growth opportunities outside Australia.
It's very normal for investors to focus on equities in their own country, but Australians who only invest in the domestic market could be missing out on emerging themes and sectors internationally.
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Home bias
According to the report, Australia represents just 1.4% of the global share market.
However, many local investors allocate a large share of their portfolios to ASX-listed companies.
This tendency is known as home bias and, while it's understandable, it can also be limiting.
Investing close to home can feel reassuring: familiar brands, known businesses and local news you can follow. But familiarity is not the same as opportunity. Some of the world's major growth themes are playing out in markets, sectors and companies that many Australian portfolios may not fully capture.
Craig also highlighted that being a small share of the global market wouldn't matter as much if Australia was consistently outperforming.
However, it made 9.4% annualised returns over the past 10 years, which sounds good until you realise that, over that same time period, the US returned 15.5% and Japan 14.5%.
Major growth themes are global not domestic
Additionally, it's important to remember that buying equities is buying expected future earnings growth, and by focusing on Australia you could be missing out on some of the major growth themes in investing today.
While the Australian market might have ridden high on the mining boom and trade links with China in the past, it has limited exposure to some of today's key growth drivers.
Take Artificial Intelligence. The opportunity is not only in US technology companies, but in the infrastructure behind them, including semiconductors, memory, data centres, power generation and electricity networks. Much of that spending flows through global supply chains, including markets like Korea, Japan and Taiwan, while Australia has only limited exposure.
Looking past AI
While AI is perhaps the most obvious example, it is far from the only growth opportunity sitting outside the Australian market.
For example, Craig highlights that European countries are spending heavily to secure reliable and sustainable energy supplies.
At the same time, geopolitical tensions are driving higher defence spending across Europe.
As well as missing out on growth opportunities, investors should be aware the Australian share market is relatively concentrated in financials like major banks, and materials/mining. There is nothing inherently wrong with these sectors or businesses, but a well-constructed portfolio often seeks to diversify its sources of return across industries, economies, business models and growth drivers.
How to target international shares
For investors seeking exposure to international equities, there are numerous ASX ETFs that track other markets.
For example, the Betashares Capital – Asia Technology Tigers ETF (ASX: ASIA) targets Asian technology companies.
It has risen more than 60% in the last 12 months.
Another popular fund is the BetaShares Nasdaq 100 ETF (ASX: NDQ) which targets the largest non-financial companies listed on the Nasdaq market.
For European exposure, there is the BetaShares Europe ETF – Currency Hedged (ASX: HEUR) which provides exposure to Europe's largest companies that generate a substantial portion of their revenues outside the Eurozone.
