International shares: are they a good bet?

INTERNATIONAL shares have provided outstanding returns for Australian investors over the past decade but recent events have prompted some advisers to become much more cautious.

Big falls in key markets and the weakness of the Australian dollar have combined to make offshore investing a difficult proposition.

The NASDAQ market, which hosts many technology companies, is down about 66 per cent from last year’s all-time high while the Dow Jones index of blue chip stocks is down about 25 per cent.

And Japan, the world’s second biggest market, has had another poor year.

The Nikkei 225 Index reached its all-time high way back in 1989, and it is currently worth just one third of the record level.

Notwithstanding Japan’s problems, international shares have produced impressive long-term returns. Over the past decade returns have averaged 16.7 per cent a year compared with 12.6 per cent a year from Australian shares.

The higher returns from international shares have been helped by the currency.

A falling Australian dollar is good news for local investors, because it means their offshore assets are worth more in $A terms. For instance, in 1998, strong markets and a falling $A combined to produce a 42 per cent return from international shares (see table).

Conversely a rising dollar can erode market gains. In 1996, the markets had an outstanding year, up 27 per cent, but this was mostly wiped out by the rising $A, so the total return for Australian investors was just six per cent.

So what is the outlook for the $A? Macquarie Bank spoke for many economists when it stated that the $A is “at least 20 per cent undervalued” and anticipates that the currency will be worth 54 cents by the end of the year from 49 cents currently.

If this eventuates, returns from offshore shares would be eroded.

As for the markets themselves, there are two main schools of thought.

The pessimists believe we face a global recession and poor returns from shares.

The optimists, like Merrill Lynch, describe this as “the storm before the calm”.

Paterson Ord Minnett’s Robert Jackson is among the optimists. However, he advises caution until markets and the dollar stabilise.

“I’m not investing in any international funds at the moment, and I haven’t been doing so for several months,” Mr Jackson said.

RetireInvest’s Lindsay Binning agrees that now is a time to be prudent. He suggests that investors wanting to invest offshore should “average” into the market, investing only a portion of their money.

Lindsay says that investors should not lose sight of the fundamental attractions of international shares.

Australia comprises less than two per cent of worldwide share values, so there are tremendous opportunities offshore. Investors can buy into industries such as aerospace and global brands like Sony, Nokia and Boeing that are not on the Australian sharemarket.

“A combination of Australian and international shares has the effect of smoothing out returns, since shares in different countries will perform differently year to year,” Lindsay said.

He added: “International shares should be used by investors looking for capital growth. They typically pay relatively low levels of income, and the income does not have franking credits.”

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