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Is the World Your Oyster?
Neil A Costa
In recent years many Australians have achieved much higher returns from their stock trading and investing by trading overseas markets - in particular the United States' market. In 1993, Australians invested some $3 billion in overseas stocks. By early 2001, this figure had ballooned to more than $16 billion. It is possible, however, that the party may be over.
The Advantages of Trading and Investing in Overseas Markets
Diverse Economies
All free market economies have times of boom and recession. Their times of boom do not necessarily occur simultaneously, however. Clearly, our chances of success are greater if we invest in stocks in countries with very strongly growing economies and strongly trending stock markets.
Diversified Sectors
One of the strongest reasons for trading or investing in overseas stocks is that it allows much greater diversification. Australia accounts for just 1.3 per cent of the world's market capitalisation, compared with the United States' 57 per cent. As a consequence, limiting one's trading to stocks in such a small market, in relative terms, may result in an inability to profit from the rapid advances in the prices of stocks from strong sectors that present limited opportunities in Australia.
Over time, strong Unites States' sectors have included the airline, technology and automotive sectors. At the time of writing, the healthcare (biotechnology and pharmaceutical) sector is a strong growth sector due to the United States' ageing population and the completion of the human genome project.
Volatility
Another advantage of investing in overseas stocks is that, over time, they tend to be less volatile than Australian stocks. This lower volatility is due to the greater breadth of sectors in the bigger overseas markets.
The Direction of the Australian Dollar
In late 1996, the Australian dollar traded at 82 cents U.S. Until recently, the Australian dollar has been losing value at the rate of approximately four per cent per annum against the United States dollar. A falling Australian dollar increases the local value of stocks held overseas. The falling Australian dollar has therefore made a significant contribution to the return of Australian traders and investors who have had exposure to United States' markets during this period.
Ease of Making Transactions
Today, many United States, Asian and European stocks can be bought over the Internet. This was not the case ten years ago.
The Disadvantages of Trading and Investing in Overseas Markets
The Direction of the Australian Dollar
In life, our strengths are often also our weaknesses. So it is with trading and investing in overseas stocks.
A rising Australian dollar decreases the local value of stocks held overseas. At the time of writing, the Australian dollar has risen above its low of recent years and is holding around 52 cents U.S.
Availability of Information
For many years it was difficult to obtain information about United States companies from Australia. Fortunately, the Internet has improved this situation to a very large extent.
Taxation and Related Issues
Before embarking on a campaign of trading and investing in overseas stocks, it is important to understand the taxation and international regulatory and disclosure issues and requirements. Taxation accountants and stockbrokers should be able to assist in this regard.
Trading Hours
The United States markets trade at night, Australian time. This should not present any real problems for medium-term to longer-term traders and investors, however it will certainly disrupt the lives, and sleep patterns, for shorter-term traders.
Conclusion
In is important to become a reasonably experienced and competent trader on the local market before trading the overseas markets. If traders are going to make mistakes, they should make them on the local market with small sums of money. I call that a 'research and development' expense. It is foolish to take on the risks associated with trading or investing in overseas stocks if one has not yet achieved trading and investment success on the domestic market.
As with any form of trading or investing, it is important to do one's homework before committing funds. Each trader should investigate the taxation and other considerations, as they apply to their personal circumstances. They should also paper trade stocks from that country to gain familiarity with the process, and to help ensure that their trading methodology is likely to be successful in that environment.
Study the trend in the Australian dollar versus the United States dollar carefully. Bear in mind that if the Australian dollar rises, the return will be smaller, or even negative.
Finally, if all of the above give a green light, start by only committing a modest proportion of one's funds to overseas stocks. One can always allocate a higher proportion at a later date when success has been achieved.
(Reprinted with permission from the Australian Technical Analysts Association Journal, March/April 2002)
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