Global equities post lukewarm results

Australians investing in international equities received a windfall this year, with signs of recovery in all major world markets. However, compared to returns for Australian equities, returns from international equities were relatively modest, and thanks to even weaker returns in 2001 and 2002 and an ever rising Australian dollar, it remains to be seen whether the asset class that was once the pet of every portfolio will shake its damaged reputation.

But lower returns relative to the Australian sharemarket and a strengthening of the local currency aren’t necessarily all that bad for international investors, says Invesco global chief executive John Rogers, who talked to Money Management recently while visiting Sydney from Atlanta.

“If you look at the actual returns to Australian investors over the past 12 months, they’ve probably been positive, so that’s a good problem to have — I would say — rather than a bad problem.

“The Aussie market has been a spectacular market, so other markets sort of pale by comparison,” Rogers says.

“As an observer from outside, Australia has got the bedrock fundamentals, which are relatively strong population growth, relatively strong productivity, a very clear set of rules around retirement savings, governments that are not running deficits, commodity prices that are pretty strong so the terms of the trade are good, a currency that’s been rising, which always tends to help the domestic market, and then to top it off, low unemployment, rising income, and relatively low interest rates.”

And for those who hedged their international equity investment to protect returns against a stronger Australian dollar, returns were far better. Rogers says returns for Invesco’s hedged global equity fund for 2003-04 were 19 per cent compared to 10.9 per cent for the unhedged version.

Fidelity Investments investment director Charles Wall also emphasied the importance of currency management. “In a low return environment, the swings in the Australian dollar can have a significant impact on returns,” he says.

He believes one of the reasons the Australian sharemarkets have performed better than international markets recently is because of the sector composition of the domestic sharemarket.

“This year the IT sector has been the worst performing in the market and energy has been the best performer. Australia’s got more than its fair share of energy companies and less than its fair share of IT companies.”

He also puts it down to decreased global investor confidence.

“While company profits have been surprisingly strong over 2004, world equity markets have been trading sideways within a band as investor confidence has waxed and waned in the face of higher interest rates and oil prices,” he says.

Going forward, both Rogers and Wall are reluctant to predict future local and global performance, although Wall says in international equities the outlook for growth in 2005 is “modest at best”.

However, both agree that international equities are still a valuable investment for the long-term as they expose Australian investors to a greater range of sectors, thereby increasing diversification.