Blog: How to invest in International Share Markets
Australia represents about 2 % of world market capitalisation. Most Australian investors have most of their assets in Australia. Given that we Aussies love bricks and mortar we tend to have a high proportion of our assets in housing with the primary residence usually being the largest asset. Most middle class investors also have negatively geared property and some even have property in their SMSF often representing a large (or too large?) part of the total funds assets. The rest tends to be in Australian shares with the usual suspects being the banks, BHP and RIO, Telstra, Woolies…. The percentage of non Australian assets tends to be very small. This tends to make sense when the Australian share market outperforms other world markets AND the Australian Dollar appreciates against most other currencies. However once the Aussie depreciates and/or Australian share underperform it is imperative to look at overseas equity investments.
It makes sense to start with liquid, developed capital markets and the US stands out in this respect. The USA has the best developed equity market in the world with about 10,000 stocks and about 3000 ETFs listed. Reporting standards are strict and companies have to report on a quarterly basis in comparison to Australia that only requires profit reporting on a bi-annual basis. The market thus receives more regular news about a company’s performance and its shares can be priced more accurately and in a more timely fashion with probably less earnings surprises. The US also is very strong in sectors that Australia lacks. Australia tends to be overweight in banks, materials/resources, telcos and some large retailers but is considerably less developed in high tech, pharmaceuticals and biotechnology. And these are exactly the sectors where the US equity market excels. These are the sectors promising above average profit growth. So an Australian based investor really should look at overseas markets and probably start with the US.
But how do you go about it? Most medium sized Australia share brokers do not offer dealing services overseas. The larger bank owned brokers usually over share brokerage in overseas markets and often overseas investment can be done from the same share trading account as Australian equities. So if you already have an account with ComSec or NAB this would be the most convenient way to establish overseas equity exposure. However, fees are a bit on the high side. The fees charged are obviously brokerage (not that cheap) and often nominee fees if you trade only infrequently. Nominee fees are charged for the cost incurring to a custodian holding your overseas shares on your behalf as you usually do not receive share certificates any more. The major costs most often not well understood by the investors are foreign exchange costs. As you are Australia based, most of the time the funding of your account will be in Australian Dollars whereas the purchase of foreign shares has to happen in the foreign currency, be it US Dollars, Euros, British Pound or any other currency. Usually the bank owned broker does not charge a brokerage for currency conversion, e.g. sell Aussie, buy US Dollars, but a spread, a different price between buying and selling. On an institutional level, the spread is very tight, in AUD/USD only a pip or two. So you would sell one Australian Dollar to buy US$ 0.7400 or you would buy one Australian Dollar to sell US$ 0.7399. Doing this for AUD 100,000 would cost the investor a spread (difference between buy and sell) of (0.7400 – 0.7399) * 100,000 = $ 10. Looking at the fee page of NAB the spread is quoted as 0.5 % to 0.8 %. This equals a whopping $ 500 to $ 800 currency conversion fee on a $ 100,000 transaction. Probably a reason why you should be the owner/shareholder of the bank and not the customer. The brokerage is, again using NAB as an example, 0.11 % of the transaction cost or $ 22.00 (incl. GST) for a $ 20,000 trade. These fees really can add up.
In order to cut cost you could go straight to the US, for example, and find a local discount broker there. You would have to fulfil all local compliance requirements. The smaller brokers would not have a multi currency facility and as such you would have to do again a transfer using your local bank, again paying significant currency conversion fees.
Best would be if you use an international broker that has a multi currency facility and has a branch/subsidiary registered in Australia and thus falling under let’s say the US AND the Australian regulatory umbrella. The broker will need an Australian Financial Services Licence, will then be regulated by ASIC, will need Professional Indemnity insurance and be member of an external dispute resolution scheme. Clients funds held must be segregated from company funds so that they stay secure in case of a default of the broker. We prefer using an Australian based and registered international broker and can recommend some to interested investors.
The brokerage charged starts at USD 1.00 for a share transaction of US$ 10,000. The spread is an institutional spread of usually one pip with a relatively small FX conversion brokerage starting from USD 2.00.
Our counterparties have various trading platforms for PC or mobile and 24 hrs support. We can help with account opening and running you through the order platform to make sure your first orders go through smoothly. You can trade equities, ETFs, options, futures, metals, bonds in all developed markets in North America, Europe and Asia Pacific.