How to Invest in International Stocks?
Investing in international stocks can boost your returns, help you diversify your portfolio or enable you to benefit from currency exchange movements. Surprisingly many investors don’t actually know why investing in international stocks may be beneficial and therefore don't know how to get started. This article will explain the risks and benefits of investing in international stocks and explain how to do it.
Australia in the Context of Global Stock Markets
Most Australian investors have the majority of their share portfolio invested in ASX companies, more specifically the stocks listed on the ASX 200. While Australia is home to a dynamic and large stock market, on a global scale it represents only a small fraction of investable global equities. According to the S&P Global BMI (Broad Market Index), a global benchmark that includes large-, mid- and small-cap stocks across 48 developed market, Australia represents less than 3% of total equity.
Diversification in International Markets: Why Invest Overseas?
Investing in other international markets has numerous benefits as outlined in various research notes over time. For many investors diversification across global equity markets has become a common practice for asset allocation and portfolio management. Every economy is different and so is the composition of local stock markets. Other countries might offer you access to sectors that are poorly represented in your home country or in some cases non-existent. The banking and mining sector has an exceptionally strong weight in the ASX 200, while technologies is relatively underweight compared to the U.S. stock market.
Australia’s stock market is heavily concentrated in a few sector as we can see in the pie chart below:
ASX200 Sector Breakdown as of 31 August 2015
Image Source: Standard & Poor’s
S&P500 Sector Breakdown as of 31 August 2015:
Image Source: Standard & Poor’s
As we can see in the sector breakdown, the U.S. benchmark index S&P 500 has a higher weight on the I.T. and Healthcare sector, and overall the index has much higher stock diversification. Research has shown that its members are significantly more liquid compared to those companies trading on the S&P/ASX 200.
However investing in international equities offers more benefits than just access to other industries and sectors. A global approach can generally help to improve diversification of assets and reduce overall volatility. By investing in high-growth countries you might be able to achieve higher net returns or even de-risk your portfolio without having to increase your allocation to lower-risk assets. Diversifying into international markets expands the investment opportunity pool and simultaneously provides local investors with the opportunity to access high growth markets in times when the home country lags behind.
The Impact of Foreign Exchange rates
Foreign Exchange rates will impact your international investments as those investment are typically held in the respective local currency. If the Australian Dollar (AUD) weakens relative to the nominated currency of your investment, the net value of your investment grows in AUD terms. If the AUD strengthens relative to the nominated currency of your investment, the net value will shrink in AUD terms. The impact of the currency exchange rate will only materialise when you choose to close your position and convert the proceeds back to Australian dollars. The same applies to cash or any other investment classes held in foreign currencies.
Foreign exchange movements can significantly impact your international investments and anyone who wishes to diversify should be aware of the risks associated with investing in international equities.
How to Buy and Sell International Stocks
Investing in international stocks is not so much different from investing in Australian shares. First and foremost you have to find out if your broker offers you access to international markets. The largest brokers in Australia offer access to the most popular overseas markets such as the U.S., the U.K, Germany, Japan or Hong Kong. Online brokers such as nabtrade, ANZ, Westpac, Intelligent Financial Markets or Commsec have introduced international share trading on the most common exchanges such as the NYSE, NASDAQ or XETRA. However also smaller boutique brokers have expanded their product pool to overseas equities.
Before you buy or sell international stocks make sure you enquire about fees and terms and conditions for trading international stocks as it may differ from transactions in Australia.
You can read our comprehensive guide on how to buy or sell shares here.
ETF’s or Individual Stock Purchases?
As soon as you know if your broker offers you access to international markets, you will have to determine which companies to buy. The stock picking process is the same as when you pick a stock on the ASX, however you might be less familiar with overseas companies. If you want diversified exposure to an entire market you could consider buying an ETF or managed fund. iShares Europe ETF (IEU:ASX) is a European ETF composed of European Equities and tradeable on the ASX.
ETF’s can be a very easy tool if you are bullish on an entire market, industry or sector as it offers diversified exposure to a pool of companies from the same region or with similar characteristics. Similar to the local market you can also hand pick individual companies that offer strong yields and long-term growth potential.
Wise-owl Provides International Recommendations
In 2015 Wise-owl’s stock picking service has introduced an international portfolio with a 12-month outlook. If you want to receive our recommendations join now or sign up for a free 21-day trial. Alternatively feel free to call us on 1300 306 308 if you have further questions about international equities.