Investing in Australia
With the Australian economy now in its 29th consecutive year of growth, it’s easy to see why local investments are so popular. In fact, it’s estimated that 75% of Australia’s direct shareholders only hold domestic shares.[1] SMSF investors also tend to favour Australian stocks, with direct international shares making up less than 1% of the country’s total SMSF investments.[2]
Historically, the Australian share market has provided strong returns over the long term compared to its international counterparts – and of course, it can be comforting to invest in companies you know and trust.
But that’s only part of the story. Franking (or imputation) credits are another reason why domestic shares are particularly attractive to Australian investors.
Here’s how they work: After an Australian company has paid company tax on its earnings, it pays dividends to the company’s shareholders. Each shareholder is then entitled to a rebate from the Australian Tax Office for any tax the company has paid.
This added benefit makes domestic shares potentially more lucrative for Australian taxpayers, especially self-funded retirees looking for yield in a low-interest environment. But could the lure of franking credits be holding back Australian investors from diversification and growth?
Investing overseas
The ASX makes up less than 2% of the world’s total share market value.[3] So if your portfolio only includes domestic investments, then it’s not as diversified as it could, and should be.
By broadening your investment focus, you can pursue opportunities to invest in the world’s largest companies like Amazon, Apple and Google. There’s also access to many industries that aren’t represented in Australia.
You can also gain exposure to emerging markets on the brink of rapid economic growth and to sectors that are under-represented at home, like healthcare, pharmaceuticals, renewable energy, aerospace and artificial intelligence.
What’s more, investing offshore can help to spread your investment risk across different economic regions. So even if the Australian market experiences a downturn, other regions you’re invested in may be going a growth cycle.
However, it’s important to be aware of other risks that come with investing overseas. For instance, political and economic instability can cause shock-waves across global markets, as we’ve seen recently during the Brexit negotiations and Trump’s trade war with China.
Depending on where you decide to invest, there may be country-specific laws that apply to foreign investors, or unexpected tax rules that could affect your returns. Currency risk is another consideration, as your gains and losses will be at the mercy of international exchange rates and fluctuations in the Australian dollar. Even factors like time differences can impact the value of your international trades.
The value of expert advice
Building a strong and diversified portfolio requires time, experience and expertise. That’s why it’s so invaluable to have an expert in your corner who understands market trends and can find new investment opportunities that match your financial needs.
Capital Partners takes an evidence-based approach to your investments, so we can help you balance risks and returns while making your money work harder for you.
[1] Deloitte, ASX Australian investor study, 2017.
[2] Australian Tax Office, SMSF statistical report, 2018.
[3] World Federation of Exchanges, Ranking of international exchanges, 2018.
