Protests in Greece and Spain grab the headlines but there is a flipside to the turmoil in Europe for exporters there who are reaping the benefits of a lower Euro. And while politicians in the US hold inquiries into the financial crisis, many US companies have used the downturn to cut fat and strengthen balance sheets.
The outlook for some of the top US and European stocks and a higher Australian dollar are encouraging more investors to consider international investment. For the past 10 years, and particularly during the GFC, the local market outperformed its US, Europe and UK counterparts, but as they start to recover they are likely to make greater gains than the All Ordinaries.
CommSec’s head of international and derivative markets Peter Tardent says more clients began buying international stocks six months ago when the dollar started rising. He says the big names such as Apple, Google and Microsoft have been popular and contrarians who believe US financials have been beaten around enough have been buying stocks such as Goldman Sachs.
Peter Opie, senior vice president of investment at Merrill Lynch Wealth Management says Merrill likes European markets because some of the major companies are cheap.
He says they have terrific balance sheets and the lower Euro means their exports are increasingly competitive. Opie points out that the turmoil in Europe reflects risk at a sovereign rather than the corporate level and says Merrill likes large exporters such as Siemens, BASF and the German car companies.
He says many American companies are well placed for growth, with strong balance sheets and plenty of cash. Opie sees plenty of mergers and acquisition activity in the US as the economy improves and cashed-up companies start to use their financial muscle. Merrill likes the major brand names such as Coca-Cola, McDonalds, and some of the drug companies and consumer stocks.
Apart from diversification into different markets, international stocks also provide exposure to other sectors. The US for example, has a greater number of substantial technology and health companies than Australia, while Taiwan and South Korea have more technology stocks. BlackRock iShares director Tom Keenan notes the ASX200 is dominated by financials and materials. “Sixty per cent of the market is those two sectors, investing globally can give you exposure to sectors not readily available on the ASX,” he says.
There are caveats. Investors have to consider how they will research and monitor their stocks and their comfort level for risk on both the investments and currency movements.
“There are two factors to consider when making valuations,” says CMC Markets strategist Ric Spooner. “What is happening to these stocks in their own currency and also the value of the Australian dollar.” He notes that since April our market has fallen around 11%, but the S&P500 is down only 2% in Australian dollars over the same period. Europe’s benchmark of 50 blue chips, the Euro Stoxx 50, is down 15% in Australian dollars because the dollar has strengthened against the Euro.
While some investors will be buying US stocks in the belief that the Australian dollar will fall against the US, Spooner is not so sure. He sees the AUD remaining strong on the back of growth in China. Although he says it is too early to call the bottom of the Euro/dollar Spooner says that once European markets start to recover they could be relatively attractive. “They have fallen hard and some sectors of the economy will benefit from that – particularly export industries.”
It is relatively easy to buy foreign shares from Australia, but not so easy to research and monitor them without using the expertise of a wealth or fund manager. CommSec operates 24-hour international trading, with orders given by ‘phone. Head of distribution Brian Phelps says the most popular markets are the New York Stock Exchange and Nasdaq but there is also interest in the Singapore and Hong Kong exchanges. He reports little demand for European stocks and says many clients are expatriates who know what they are buying. CommSec does not provide research on international markets. Ric Spooner says CMC clients can trade on-line and get access to news and technical analysis.
Another option for investors who want to trade directly is an exchange-traded fund (ETF). “It is too hard to try and pick individual stocks and it is expensive to trade them from Australia,” says iShare’s Tom Keenan. He says investors with a long-term plan for asset allocation will typically use two or three ETFs and might tilt their investment say towards China or emerging markets. Attitudes on hedging tend to depend on the fund. Investors in emerging markets funds tend to be more comfortable unhedged because they believe over time those countries’ currencies will appreciate more than the currencies of stgeloped economies.
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