Trading with Focus – Why trade overseas?
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Why is everyone obsessed with international shares? What’s wrong with Australian-made?
Thor, Wolverine, The Joker, Braveheart, Noah, The Mentalist, one of the Kyle Reeses (Terminator’s boyfriend), Harley Quinn, Galadriel (in Lord of the Rings). All epic roles in American movies, all played by Australians.
Even our wildlife is kick-ass. Snakes; we have the dangerous ones, many of which live in our in capital cities. Spiders; heaps of the worst, most murderous types probably just dangling above your head RIGHT NOW! Kangaroos; have pockets and are just chilling out around golf courses looking buff. We even evolved a duck/koala hybrid thing.
Weather; all of it, from snow to extreme heat. Waves. Mountains. World class scuba diving. Gorges.
Our political parties are so mild as to be virtually interchangeable. Our response to gun control is unbelievably sensible, we have healthcare and a social security system that works well. An economy that needed a global pandemic to have a bad quarter – for the first time in nearly 30 years!
Our universities are pumping out big brains so quickly we have to import more people to push through them. We invented the black box flight recorder, pacemakers and even Google Maps. We invented the Cochlear implant. Spray on skin. Ultrasounds. Pacemakers. We’re even good at sports!
Wesfarmers, arguably one of the best managed companies in the world. Our banks took a few minor hits because of the GFC that was caused by American banks, and were the world leader in their capital controls. We have every sort of commodity known to man just lying around waiting for some of our hard-working workers to dig it up.
So really, when we finally get asked to vote for the best country in the world, I’m still going to vote Australia #1, even though Kevin Rudd took the top job once or twice. (He seems to be back sniffing around looking for a podium too, so keep an eye out, we need to be vigilant.)
But everyone all of a sudden seems desperate to buy international shares!
At Marketech we aren’t sure just yet how or when we are going to give people access to the international markets (but we probably will, too much whingeing otherwise).
For an investor there’s a lot to consider, so let’s walk through a few considerations before we start punting shares in a country that is still infighting about whether the old guy who can’t walk up stairs somehow stole an election from the guy that made jokes about disabled people, and where shooting a bunch of people is sort-of understandable if you’re having a bad day.
If there is one thing I learnt this year it is that I like living in Australia, and America just looks like one big dumpster fire combining the worst parts of humanity, with all these awful parodies fighting with guns as they push each other down to get ahead. Their capitalism is seemingly unbridled, and that has been good for investment returns, but like the stock market, when something swings too far one way it’s more likely to swing back.
There’s a new government in the US led by a comparatively normal human, and a growing swell against ‘them rich folk’. This might mean some of the excessively loose corporate tax rules are wound back, or new taxes imposed. They have a huge national debt that started scaring people after the GFC (and is some multiples bigger now), and they will need to have a plan to pay it back.
China owns most of the debt, and that can be a massive problem in itself if they decide to sell up.
There are also a lot of very lowly paid people in America. Very low, like ‘working three jobs just to eat’ poor. Will the rebellion against excessive CEO salaries mean the US$7.25 minimum wage will go up? If so, some of the biggest corporations will need to either jack their prices or squeeze their margins, neither of which are good for profit growth.
The S&P500’s average Price-to-Earnings ratio is fairly skewed at the moment, as they had an unbridled pandemic. The ‘E’ in P/E has dropped, but the ‘P’ has kept rising. The long-term mean and median (averages) of the PE on the S&P500 are around 16-17x (meaning the earnings of the companies would take that many years to pay off your investment). At the moment it is around 35x. So either profits will need to rise significantly, or… there’s a lot of downside risk to revert back to the average.
The ASX200 by comparison is on 23x, still a bit high for my liking but hopefully profits are roaring back!
Apart from the usual ‘black swan’ events that seem to pop up a lot these days, like a dotcom crash or a GFC or a global pandemic or Sept 11 or a nuclear disaster, or China starting some shit, or a large European nation going into collapse (like, maybe Turkey is?), there is also a risk that there are just too many retail investors in the market.
This is often a sign that things are a bit too hot, and fundamentals go out the window. I don’t see a cult forming around Twiggy to the extent of say, Elon Musk. Yet ‘our Twiglets’ has had a record year for profit, paid out enormous dividends and generally runs a company that makes good investment sense. But, there is way more retail money flowing into Tesla than there is FMG because, what? Elon gets how to meme with the cool kids?
Retail investors bail out en-masse when things get sticky, even if they pretend they won’t, so sell-offs can be swift, deep and as ‘beyond reason’ as much as some of the rallies can be.
Speaking of dividends, US Corporations don’t pay out as much as Australian companies. Their average yield is about 1.5%, whereas ours is around 4.4%. And often, our dividends are received with ‘tax paid’ or ‘franking’ associated to it, so there’s often a level of support for a beaten up blue-chip once the divvie yield gets compelling.
Especially with Australia’s fantastic SMSF system, and the significant amounts of money held within them looking for a home in a low-interest rate environment by our beloved Boomer generation.
And there’s the tricky issue of earning money overseas and paying tax on it. I have no idea how that even works, so ‘no comment’ from me apart from the fact that it probably costs more at the accountant.
There has also been a huge tailwind behind investments made in USD too, ever since the last mining boom peaked in 2011. The USDAUD peaked out around $1.10, and dropped as low as 55c, so even if you had just held USD (in cash) you could have moved it back to AUD in March last year and got twice as much!
With the amount of USD money printed over the last 12 months, it’s surprising that we haven’t seen a weaker USD, but it has been getting a little weaker of late. As the AUD rises, it becomes more expensive to buy them back, and you lose absolute returns.
If the AUD goes back up to $1.10 as it was in 2011 because of a mining boom, your USD dominated investments would have to rise by 44% just to cover the exchange rate! And personally, I’d be betting more on a mining boom than a strong USD.
So, to broadly state it, either you are the sort of person who thinks it’s cool to say you bought some Tesla shares (even though you have no idea whether they are a good investment or not), or you think that somehow you need international shares to diversify your portfolio. Or you just hate your country (which ironically you are allowed to do here but it’s frowned upon, often with accompanying bullets, in America).
You can’t ever properly diversify a portfolio with direct shares. You just don’t have enough money or know-how. There are at least four different asset classes and then a multitude of different countries and their multitudes of different companies within. If you’re picking individual stocks you are, by definition, speculating.
So have you thought about getting a spread of ETFs? Sure, there’s a management fee, but when you don’t know how to fix a sink you get a plumber, right? They offer some great international exposures, and some of them even hedge out the exchange rate volatility. They’re listed here, easy to trade and sit on your HIN.
But if you have accepted you are a speculator, why do they even need to be shares? CFDs were literally built for gamblers such as yourself and are often free to trade. They don’t have to be leveraged, but they’re no better or worse than a custodial account that is held offshore by some broker you don’t know who you’re trusting to hang onto your shares or money for you.
You don’t really know what you’re doing anyway, so what’s it matter if the custodians run off with all your money? Either way you’re going to get screwed on the exchange rate and the spread.
We’ll also be looking at getting Chi-X data fed into our platform soon enough, and they have some great things called ‘TraCRs’. They are a listed HIN-based instrument that allows you to get exposure to some of the biggest names in the US, and you trade them just like Aussie shares. Seems like a lot less work than opening a separate account just for international shares, and a separate cash account to hold your USD.
I used to work with a trader who purely followed the charts. Looking for breakouts and volume and all sorts of hoodoo. She would have loved our platform! But she didn’t care what the company did, or where it was, she was just looking for a set of repeatable market indicators to get a trade out of.
Whenever I bag out international shares, some people scream out in disgust “but our companies are too small!”. Big doesn’t mean good, Karen. A 10c share can be a better investment than a $10 one, and vice versa. Size doesn’t matter. The share price doesn’t matter. The only thing that matters is whether it goes up in value from the time you buy it – am I right?
We have all the big sectors of note – mining, oil, tech, financials, retail, science stuff. We might not have ‘autos’ but who cares? You can find a 10-bagger here as easily as anywhere, but you’ll probably have better access to the ASX than the NYSE, and more information about the company.
Hell, for about two-thirds of the ASX you could pick up the phone and ask to speak to the MD – and they would take the call.
There are around 3000 shares on the ASX. At any given time I might be playing around in four or five of them. At any given time I’m struggling to get 20 shares in a watchlist, because you can’t possibly know enough about a hundred companies to be investing or trading them properly, or follow them religiously each minute of the day. I also think that if you can’t find a trade on the ASX, you aren’t going to find one anywhere!
I wonder whether you can even really know enough about an economy that you don’t live in. It’s not just a case of reading the CNBC feed or CNN or Yahoo News, it’s the vibe of thing. Scotty from Marketing can barely make a decision beyond what tie to wear in the morning without months of lead-up debate, but I have literally no clue what Biden will do.
Look at some of the stuff Trump got up to! There are too many wildcards. And I’d prefer to be awake when they get announced to the market so I can GTFO if needs be.
I’m not saying don’t trade US shares, or the UK’s FTSE or Turkmenistan’s whatever. Largely, I’m just trying to explain away something we haven’t connected yet, whilst explaining in a semi-belligerent tone why it’s really not that important (right up until we do have it).
Have a long hard look at yourself though and ask yourself whether you really need the pus and pain of it all. Just because something, or some stock or some index has been doing well for a few years doesn’t mean its going to forever. There are quite a few reasons for sticking around here and using your hard earned Macca’s pay to support local. And depending on your trading/investing/gambling strategy it might actually make better sense.
Don’t associate fame with fortune. There’s some great stuff going on in Australia and on the ASX, and we’ll be here to help you trade it! (And if Kevin Rudd is reading this, don’t think you’re going to slink on back just because you grew a beard.)
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This article was developed in collaboration with Marketech Stockbroking Pty Ltd (AFSL 486148), a Stockhead advertiser at the time of publishing. This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.