When it comes to investing in global equities, Australians often prefer not to.
Australians’ bias to domestic equities may be declining, but it remains strong when compared with that of other countries.
Reasons for their home bias haven’t always been crystal clear, but the fact that our economy has been relatively robust in global terms, as well as the lure of franking credits and a ‘better the devil you know’ attitude may all be contributing factors.
At the same time, the economic health of our nation is inextricably linked to international trade and, in particular, commodity exports.
Despite the efforts of policy makers to facilitate the transition from a resource-based economy to one more dependent on services and knowledge, as a nation we remain unduly reliant on the export of primary resources for both employment and tax revenue.
In fact, according to the Department of Foreign Affairs, commodities make up almost 52 per cent of Australia’s export.
“Given the size of the Australian market, it does make sense to look further afield for broader opportunities and the benefits of diversification. But you can do just that right here at home, without the cost and risk of accessing offshore markets.”
Time to head offshore for returns?
Fine for the good times.
But the bad news is that the mining boom is over, and the flow-on effect of its collapse has not yet been fully felt across the economy.
Lower commodity prices continue to exert pressure at all levels, and even the falling Australian dollar isn’t getting us out of trouble.
Current growth rates of around 2.3 per cent are too low, and domestic demand is flat.
Business investment has fallen sharply, and there are other headwinds too, including an ageing population and high levels of household debt.
Is this bias preventing Australian investors from realising potential gains from international diversification? Not necessarily.
So should investors brave the unknown and head into overseas markets in search of potentially better returns?
The answer is that they don’t need to. A number of quality Australian companies with global business models and exposure offer investors the best of both worlds.
Quality businesses are not defined by the stock exchange they are listed on, or even by the revenue they achieve in their home country.
In a digital world where physical borders are becoming less important, many of the most successful global corporations operate fluidly across continents. In fact, in Hyperion’s portfolio of Australian-listed companies, over 50 per cent of the revenue generated is internationally sourced.
The benefit of both worlds
The right Australian company can give Australian investors all the benefits of exposure to international markets and revenues without the downsides, which include currency and broking issues and costs, security of market and tax treatment – just for starters.
The real challenge lies in identifying which of these companies, competing on the world stage, have the quality fundamentals to deliver strong and reliable growth in the long-term.
Hyperion’s track record shows that the companies most likely to provide long-term earnings growth are those with a sustainable business model, in large growing addressable markets with structural tailwinds over the long-term.
In other words, our investment philosophy remains the same whether or not these markets are domestic or international, or a combination of both.
That’s not to say that operating globally is without risk.
International markets require that companies expose their revenues to the potentially adverse effects of fluctuations in relevant currencies, for example.
For long-term investors however, this risk is significantly reduced, because currency movements tend to revert to the mean over the long-term.
In other words, short-term movements in a currency will not affect the long-term earnings growth and sustainability of a quality company.
Stand-out Aussie companies with global links
There are a number of stand-out Australian companies which we believe are globally competitive.
For example, the Australian logistics company, Brambles, is listed on the Australian Securities Exchange (ASX), yet operates in over 60 countries and earns 90 per cent of its revenue outside of Australia. It has a sound global growth strategy, a strong customer value proposition in the size and quality of its pallet pool, and the high barriers to entry to its markets offer it a sustainable competitive advantage.
The online job search website, SEEK, is a second example. It currently earns 60 per cent of its revenue from overseas, a figure which we expect to grow, and its position as the number one online job search company in Australia, with the largest inventory of opportunities provides a high barrier to entry for global competitors.
Global investment management company, Henderson Group, is another stock that illustrates our point.
Operating mainly in the UK and Europe, it obtains 99 per cent of its revenue from overseas.
The breadth of its product offering – diversified by channel, asset class and geography – has strengthened its competitive advantage and allowed it to expand its operations globally, which continues with a move into the US.
Franchise pizza chain, Domino’s Pizza, is also on our overseas watch list.
An ASX listed company that earns 32 per cent of its revenue outside of Australia, it has the number one free app in the food and beverage market and a competitive price range that edges out competitors: a strong customer value proposition.
Its growth strategy centres on leveraging its established systems and IP to expand into the growing European, New Zealand and Japanese markets, positioning it for long-term sustainable growth.
Identifying companies likely to perform well over the long term is not a matter of chance. There is no particular correlation between the successes or otherwise of a particular company and the stock exchange on which it is listed.
The quality fundamentals which allow companies to grow their earnings sustainably over the long-term can be present in companies based in Australia, or anywhere else.
At the same time, given the size of the Australian market, it does make sense to look further afield for broader opportunities and the benefits of diversification. But you can do just that right here at home, without the cost and risk of accessing offshore markets.
Tim Samway is the managing director of Hyperion Asset Management.
