The fading 'wealth effect' continues to weigh on the domestic economy as consumers and businesses adjust to a weaker housing environment. A strong infrastructure pipeline may take some pressure off over the short term, but with businesses looking to conserve capital rather than re-invest, we think the medium-term outlook will remain subdued.
Without meaningful tailwinds to offset some of the weakness, the Australian market is likely to underperform other developed markets over the next 12-24 months. Meanwhile, the US economy continues to power ahead. Macro indicators of employment, corporate profits, consumer sentiment, and industrial production inflation are all at multi-decade highs. An investment in the broad based S P 500 index would have returned investors 20 per cent over the past two years. With the Australian market representing just 2pc of world market capitalisation, we think it's prudent to diversify beyond the domestic market to access global themes and sectors that would otherwise be missed.
Investing offshore has never been easier with 147 ASX listed products available to choose from. Much has been written about the fact that Australian retail investors' portfolios are heavily weighted to Australian equities, despite the domestic market representing a very small proportion of global equity markets.
It is not difficult to understand the reasons for this home bias given:
- The benefits of the dividend franking system (which is now under pressure);
- The perceived difficulties of direct investing in foreign markets; and
- The cross-currency risks associated with offshore.
The universe of global equity investment opportunities is vast, but researching and selecting the right shares to invest in is a challenging task for the typical investor. There are numerous indirect options for Australian investors to gain international exposure, with both managed and passive opportunities. There are a significant number of exchange traded funds (ETFs) with a broad range of exposures to global equities.
These are passive investments designed to track the performance of a certain index. There are also a large number of unlisted actively managed funds offering exposure to a broad range of international markets and sectors.
Our preferred global exposures include: Magellen Global Trust (MGG), Future Generation Global (FGG), iShares Global 100 (IOO).
Rise of the middle class
We find this an interesting theme at the moment due to Trump trade negotiations with China. The MSCI Asia Ex-Japan (AUD) has done 2.3pc to the end of March 2019. Over the same period the MSCI World Net total return index has delivered 12.3pc. With this mind we think Asia markets look interesting.
In Asia alone, 525 million people already rank in the middle class, more than total population of the European Union. Over the next two decades, the middle class is expected to expand by 3 billion.
China's population growth rate is quite slow. However, with nearly 1.4 billion people already, even half a percent of growth adds 7 million people, roughly the size of the population of NSW. Global luxury brands and franchises are best placed to capture this opportunity. In China alone consumers account for 30% of global luxury goods purchases.
For direct exposure towards this theme there is ASX listed investment companies which invest directly into Asian markets. Our preferred exposures towards this theme is Ellerston Asia (EAI) and Platinum Asia (PIA).
- Boh Burima Financial Adviser (Authorised Representative: 000341081) Morgans Financial Limited ABN 49 010 669 726 | AFSL 235410