Burnt by a decade of poor returns, Australian advisers have been reluctant adopters of international equities. But, as David Chaplin reports, the world has changed, and maybe for the better.
According to rocket scientists, the massive earthquake that struck Chile this February was of such a magnitude that it wrenched the entire globe off its axis, permanently altering the length of our days. Richard Gross, a geophysicist at the NASA Jet Propulsion Laboratory in California, told Bloomberg that following the quake: “The length of the day should have gotten shorter by 1.26 microseconds (millionths of a second).
“The axis about which the Earth’s mass is balanced should have moved by 2.7 milliarcseconds (about 8 centimetres or 3 inches).”
Set against the tragic human toll the Chilean earthquake exacted, these virtually undetectable amendments to geophysical time may appear trivial, but they are also an awe-inspiring reminder of the power of natural forces; and a poignant example of the way catastrophic events resonate through time and space. The world of finance suffered its own analogous catastrophe on September 15, 2008, when the collapse of US investment bank Lehman Brothers rocked money to its core, sending powerful shockwaves out into the real economy. But, just as the post-earthquake planet keeps on spinning, 18 months after Lehman Brothers imploded, the world’s financial markets continue to turn, albeit on a slightly different axis and a wobblier trajectory. Share investors, in particular, might feel they are in a different orbit since the black hole left by Lehman’s first pulled them down towards oblivion before slinging them up towards the stars at dizzying speed. From their peak in November 2007 to the low point in March 2009, global sharemarkets slumped by about 50-60 per cent.
While Lehman’s accelerated the process, equities were clearly already on a downward trend. Since March last year, however, equity markets have bounced back in a spectacular fashion. Figures reported by Morningstar US show the broad US stock index was up by more than 73 per cent in the 12 months ending March 5, 2010. The rest of the world rebounded nicely, too, with the MSCI All Countries (in $US terms) benchmark climbing almost 71 per cent over the same period. But it was the emerging markets sector that proved the standout performer since the trough, almost doubling in the 12 months to March 5.
According to Morningstar, the MSCI Emerging Markets ($US) index grew 99.72 per cent over that period, although the result included a fair amount of currency volatility. In local currency terms, the same index climbed 67.7 per cent over the 12-month period. For Australian-based investors, the returns from international equities in the wake of the global financial crisis have not been quite as sweet as that offered by their home market.
The Vanguard Australia online index return calculator, for example, shows that in the nine months from the beginning of April 2009 to the end of the year, investors in the ASX/S&P 200 would have experienced growth of 59.5 per cent, compared to only 18 per cent from international shares and 12 per cent from the US sharemarket. Morningstar Australia figures for the 12 months to the end of February this year paint a similar picture. The standard Australian shares benchmark, the S&P/ASX 200, returned 44.7 per cent over the period while the MSCI (ex Australia) offered just over 9 per cent in Australian dollar terms.
However, the fully currency hedged version of the MSCI (ex Australia) index was up by more than 45 per cent, according to Morningstar. The complication of currency hedging is, of course, another reason Australian investors have eschewed global equities. Fund managers generally leave the hedging decision up to advisers, offering both hedged and unhedged versions of their global share funds. Research houses like to point out that over the long term, currency hedging is a “zero sum game”.
The tempering effects of currency on short-term returns from global equities, coupled with roaring local markets and the tax advantages bestowed by franking credits, would seem to confer legitimacy on the traditional home country bias shown by Australian investors and advisers.
Indeed, as Morningstar Australia notes in an international equities report published last September, in the 10 years to June 30, 2009, local investors would have seen their global share portfolios shrink, assuming they matched the relevant indexes.
“But we think that there are good reasons to suggest that now is the time to be increasing, rather than decreasing, the offshore component of portfolios,” the report says.
And the reasons, as always, hinge on diversification. The Australian sharemarket is, sometimes disparagingly, characterised as comprising of four banks and a few mines.
While the truth is slightly more complex – there are approximately 1000 companies listed on the ASX – resource and financial firms do dominate the Australian market. According to Morningstar, these two sectors account for close to 60 per cent of the top 300 stocks listed on the ASX. And as researchers constantly reiterate, the ASX represents only 3 per cent of the total international sharemarket.
“The options are therefore pretty narrow,” Morningstar says.
“If you want exposure to a telecommunications firm, few choices exist beyond Telstra. Other sectors such as healthcare and media are dominated by only a few names.