Australia contributes less than two per cent of global market capitalisation and its most dominant blue chip companies mostly lie under just two sectors – Finance and Materials.
So unless investors look further afield, their portfolio will be quite limited in diversity, according to Saxo’s Australia CEO Adam Smith, who says Australia’s narrow scope could hold investors back from reaching their financial growth goals.
“In Australia we have a very strong mining and resources sector – absolutely fantastic – but we don’t have a big tech sector, we don’t have AI, and they’re the sorts of companies that are driving growth globally, in the US, in the UK, in Europe, and in Asia,” Mr Smith said.
“The top ten ASX200 companies consist of five banks and four miners, all of which are household names… nothing else is really driving any other market.”
Australian market limitations… let’s talk iron ore
Iron ore production is primarily concentrated in Western Australia, more specifically within the Pilbara region, which stands as a pivotal hub for the industry.
Among global iron ore producers, three major companies are within the top 13 ASX listed companies BHP Group (ASX:BHP) at number 1, Fortescue (ASX:FMG) at 6, and Rio Tinto (ASX:RIO) at 13 all have heavy reliance on a single market, iron ore sold into China. Some 85 per cent of Australia’s iron exports are shipped into China. Australia is responsible for about 60 per cent of China’s iron ore imports.
The interdependency sees the global market price for iron ore influenced by the pricing dynamics established by China for Australian iron ore.
This prolonged partnership with China underscores the limited diversity in Australia’s investment landscape, exemplified by the fact that three major mining entities primarily cater to the demands of just one country.
The small exposure of companies on the ASX tends to see exploration companies target the hot commodities that are trending and relevant – at any one time.
The narrow market approach elevates the risk for investors, especially when the price or demand for a specific commodity undergoes changes.
So what does a diverse portfolio look like?
“One market doesn’t hold all of the good opportunities,” Mr Smith said.
“When we talk about a diversified portfolio, we’re talking geographically, talking across industry, talking across asset classes… to give you the best possible opportunity to generate returns and also avoid that cataclysmic collapse that would wipe out your capital.
“What you’re trying to do is ensure all your risk is not sitting with one position or stock, because that’s when things can and do go horribly wrong, whether for sectors or individual companies.”
The performance of the global share markets in 2023 serves as an example.
While the local ASX200 index in Australia gained 7.8 per cent last year, the global landscape holds a more impressive and different story.
The United States’ S&P 500 recorded a 24 per cent increase, the Nasdaq surged 54 per cent, Dow Jones Industrial indexes saw a 14 per cent rise, the German DAX index increased 20 per cent, and the Japanese Nikkei 225 index grew 28 per cent.
These results all reveal the significance of potential missed opportunities for Australian investors who limit themselves to domestic markets.
“You’re not really doing yourself any justice if you’re staying within Australia’s shores, you need to be looking overseas for opportunities,” he said.
Where to start?
Investing is very topical for individuals, whether they are starting their investment journey or planning for retirement. Adam Smith told The Market Online and HotCopper that it was never too late to start.
“It’s never too late, you should have started yesterday! Time is your biggest asset,” he said.
“There are opportunities in the world today and there will be tomorrow, fully experience taking that step and watching your wealth grow, set up your investment.”
Fear and perceived risk often deters investors from exploring foreign markets.
“When you diversify overseas, you absolutely have to be comfortable with the investments that you’re making,” Mr Smith said.
“One of the things we say is, just think about the products that you buy.
“I’ll use Apple and Netflix as my examples here – a lot of people – most people these days – would have an Apple phone, or a tablet or something with an Apple logo on it, similarly a lot of people in Australia subscribe to Netflix.
“So if we’re getting comfortable with a product, it makes sense to me that they would want to invest in the company. So that helps lower that anxiety threshold if we can put it that way.
“Similarly in a country like Japan, you have big companies like Sony – a lot of us watch Sony films, maybe play Playstation and all that sort of stuff – so, by associating with the products, I think we can get comfortable with the risk of investing in those stocks.
“But I also would argue that limiting your investments to one market actually is much more risky than diversifying across geography, because for arguments sake, if you are just invested in Australia, economies move at different speeds around the world, we know that. You know at the moment the US is still growing strongly from an economic perspective, Australia, seemingly we have a little bit of teetering, unemployment’s up over 4 per cent.
“So by putting all your eggs in the Australian basket you actually are, I think, delivering yourself more risk to your portfolio than otherwise would be the case if you looked overseas.”
So the steps to diversifying include finding a broker to help access international markets and Mr Smith said it was important to do your homework on that broker, understand their offerings and experience – basically undertaking due diligence on that broker. Then it’s about having a go and ‘dipping your toe in the water’.
Accessing more than 50 countries
Companies like Saxo – an online trading and investing platform – offer access to foreign exchange trading, Contract For Differences (CFDs), international stocks, listed options, listed futures, Exchange Traded Funds (ETFs) and bonds markets.
Saxo has a million clients around the world and its platform makes global diversification accessible. From earlier this year, Saxo restructured its pricing to provide transparent, all-inclusive rates.
Through Saxo, traders can access more than 70,000 financial instruments across 50-plus countries. This expansive reach empowers traders to diversify affordably across various geographies, sectors and asset classes.
Regardless of where individuals are in their investment journey, Saxo assists them in expanding beyond Australia and exploring opportunities in other markets.
“When an investor has a diverse portfolio, they are helping prevent risks across different assets or investments, reducing the impact of poor performance in any one investment on the overall portfolio,” Mr Smith said.
“More relevant than ever are the investment opportunities that exist beyond Australia’s shores.”
Disclaimer: Saxo Capital Markets (Australia) Limited (Saxo) provides this information as general information only, without taking into account the circumstances, needs or objectives of any of its clients. Clients should consider the appropriateness of any recommendation or forecast or other information for their individual situation.
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