Taking the Broader View - Reasons for Investing Globally
The roller coaster final quarter of 2018 highlighted the volatility that share markets can experience. During this time, New Zealand shares continued to be a standout performer, posing the question - Why do we invest such a significant exposure of portfolios outside of New Zealand?
Market Returns are Difficult to Predict
It is important to remember that market returns are largely unpredictable and being the best performing market doesn’t guarantee ongoing strong returns.
The Randomness of Market Returns - Key Investment Markets (2008 – 2018)
Rather than try to predict what market is likely to perform the best going forward, we prefer to allocate across many countries. This delivers returns that are more consistent and avoids placing all our eggs in one basket.
Diversification is Key to Managing Risk
Diversification, i.e. mixing a variety of investments in a portfolio, is one of the best ways to reduce risk.
Geographic diversification can lower overall risk because each independent economy comes with its own specific risks and opportunities. A well-diversified portfolio benefits from changes in faster growing economies and offers some protection from slowing economies.
Diversification Matters across Companies and Sectors as well
Investing internationally allows New Zealanders access to sectors that may not be available in the local market. International markets also perform differently from ours over the same period, which means there may be times when overseas markets will give you higher returns than the NZ market (and vice versa).
While Important to us, New Zealand is a Tiny Part of the Global Investment Market
Market Cap by Country (2018)
The New Zealand Market is not Very Diverse
As the table below shows, the New Zealand investment market differs greatly from that of the global investor; largely because NZ is more concentrated.
New Zealand has just 50 companies in its main benchmark, compared to 200 in Australia, and 500 in the US. The International benchmark (MSCI All Countries ETF) is made up of 1,700 companies.
The New Zealand market also has a heavy concentration in the 10 largest stocks (58%), meaning the performance of the market as a whole is largely dictated by the success of just 10 companies.
Comparing Apples with…..Infant Formula
A great example of success in the New Zealand market over the past 5 years has been niche dairy distributor A2. It has rapidly become New Zealand’s largest listed company due to its great success selling its goods to China. With a market cap above $12bn, A2 represents more than 11% of the NZ benchmark and is the most influential company in our market. Compare this with global tech giant Apple, one of the world’s biggest companies, with a market cap just under a trillion dollars, yet still only represents 2.3% of the MSCI World.
Easy to Access High Quality Companies Offshore
One of the historical rationales for investing in local equities was that it was easier and cheaper to buy shares locally rather than globally. The internet, additional competition, KiwiSaver and the rise of ETF investing has enabled investors to access international research and exposure at a similar, if not lower, cost than local shares.
In New Zealand, sectors can consist of only a few companies but the international diversification available is vast and has become relatively easy and cheap to access.
New Zealanders already have a Large Portion of their Wealth tied to the Country’s Prospects
The average New Zealand household inherently has a large exposure to New Zealand and its economy. Recently this has worked in our favour, with investor’s biggest asset being residential property, which accounts for nearly half of the household wealth. Excluding residential assets, the next largest asset is businesses, then bank deposits, both of which are likely to be New Zealand-centric.
The Makeup of New Zealand Household Assets
Diversification is one of the most important investment concepts, however is in this case overlooked. Should anything happen to the New Zealand economy, international exposure would provide a valuable buffer.
The Japanese 30-year Bear Market
An extreme example of the perils of home bias, would be the Japanese market. A Japanese investor who invested only in local companies for the last 30 years would still have an investment portfolio worth nearly half its value from its peak and be producing minimal income.
The numbers used here are extreme, and to be fair have been cherry picked for effect. However, this sort of scenario would derail the financial plans of most investors. Is such a scenario likely to occur in New Zealand? Unlikely, but not impossible.
New Zealand equities have had a stellar run and may continue to kick on from here. Regardless, we don’t see that as a compelling enough reason to ignore the inclusion of global equities in a portfolio.
Talk to us
If you would like to discuss your current investments or would like a no-obligation free of charge consultation about how we can help you achieve your financial goals please call:
0800 878 783 or
A disclosure statement is available from our financial advisers on request and free of charge.