Australia represents just 2 per cent of global equity markets yet domestic shares represent around 60 per cent of the average Australian investors’ total equity portfolio. This home country bias means investors are overweight a handful of domestic banks and resources companies with limited exposure to other sectors such as technology, industrials, healthcare and energy.
While Australia is a leader in mining and resources, beyond that very few Australian companies could be considered global leaders.
There are only around 150 Australian companies with a market cap over US$1 billion compared to around 8,000 such companies across the globe.
The global opportunity set is exponentially greater and more exciting. Investors can tap into themes such as the internet of things, big data, cyber security, blockchain, electric vehicles, biologics, luxury brands, storage and smart-grid. They can invest in the world’s strongest companies, often at relatively cheap prices.
The valuations of Australian companies relative to their global peers show many are trading at significantly higher PE multiples than their global equivalents. Stocks appear priced to perfection, which doesn’t leave investors with a margin of safety.
Consider the Commonwealth Bank (CBA) and Dutch bank ING Groep (that’s not a typo). CBA is a good bank and it’s priced like a good bank. ING is a good bank too. It’s arguably equally as good as CBA, but available at approximately half the valuation multiple.
ING has a broad global footprint and is recognised as an innovator and disruptor in banking.
A look at ING’s lending practices and the quality of assets underpinning its mortgage and loan books depicts a company in good shape. In short, Dutch housing is more affordable so ING is lending against sustainable property valuations while soaring property prices in Australia represent a substantial risk for local banks.
Furthermore, the group’s online bank ING Direct is growing rapidly backed by a low-cost, direct model that allows it to successfully reach customers all around the globe.
All that points to a modern bank and compelling investment that’s growing at a healthy, sustainable 5 per cent per annum, at a time when Australian banks are grappling with capital and regulatory headwinds and the uncertainty attached to a Federal Government that’s vulnerable to the agenda of special interest groups because it doesn’t hold the balance of power in the Senate. This is placing enormous pressure on the banks to be more realistic about the capital they hold on their residential mortgage books.
There’s no question that European banks face their own unique regulatory and political challenges however investors can access the global banking sector at relatively attractive valuations.
Basically, domestic investors are paying a hefty home market premium which can potentially be avoided by going global.
But despite the fundamentals, and the undeniable benefits attached to diversifying risk, Australian investors continue clinging to expectations of double-digit returns.
This dangerous belief is rooted in the stellar past performance of Australian equities which has been buoyed by an extraordinary commodities boom and prolonged period of economic growth. A flow-on effect was an abnormally strong Aussie dollar which has historically detracted from global equity returns.
But the tailwinds that have historically supported the Australian market are changing and in times of heightened uncertainty and volatility, prudent investors understand the importance of managing portfolio risk by diversifying and tapping into different return drivers. Professional investors can also add significant value through active currency management.
Jacob Mitchell is Managing Director and Chief Investment Officer at Antipodes Partners.
Antipodes is an underlying manager in selected diversified implemented portfolios available on WealthFoundations and soon-to-be available on WealthSolutions. The Antipodes Global Fund is expected to be available as a standalone investment option on selected platforms including WealthSolutions later this month.