Overseas investments

Investing outside Australia

It's now easier than ever for Australians to access international investments. Investing overseas can provide investment opportunities not available in Australia and help diversify your portfolio, however there are additional risks you should consider.

There are many ways you can gain exposure to overseas assets or markets including through managed funds, exchange traded funds, Australian companies with international operations or a direct investments abroad.

Here we explain some of the ways you can invest overseas, the benefits and risks and how to decide if international investments are right for you.

Why investors look overseas

The Australian share market has total market capitalisation of $1.9 trillion (as at January 2018), which represents around 1.7% of the world's total share market value.

Australia's major stock exchange, the Australian Securities Exchange (ASX), is the sixteenth largest in the world by market capitalisation, but is relatively small when compared with other international exchanges.

Figure 1 shows the top 20 international exchanges by market capitalisation at closing on 31 January 2018.

Figure 1: Ranking of international exchanges as at 31 January 2018

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Source: World Federation of Exchanges, January 2018, in AUD.

Investing outside Australia can provide the benefits of:

  • Added diversification - Spreading your investments over different countries and markets can help diversify your portfolio. This will mean a slowdown in one country will have a smaller impact on your overall portfolio.
  • Higher growth - International investing lets you take advantage of potential for growth in foreign countries, especially in emerging markets. It's important to remember that while some countries may have higher growth and potential returns, they can have a higher level of risk.
  • More options - You can invest in companies, industries and asset that are not available or are difficult to invest in domestically.

Before you invest overseas it's important to consider how the investment fits with your investment goals, risk tolerance, investment timeframe and overall portfolio.

How to invest overseas

If you are looking to invest overseas you should first think about which assets or asset classes best suit your investment goals, investment timeframe and risk tolerance.

The major asset classes are:

Once you have decided which assets or asset classes you will invest in you should consider which country or region you would like exposure to. Researching the country or region, its trends and political and economic environment is essential before you invest your money. See researching about international investmentsfor where to look for help and information.

Once you have decided the assets and region to invest, think about whether a direct or indirect investment is best for your investment goals.

Direct investing

Direct investing is where you purchase the asset yourself and hold it in your name, for example purchasing international shares through your broker or purchasing an overseas investment property.

If you are considering a direct investment it's important to find out:

  • all the costs and fees involved
  • the foreign investment laws of the country you are looking at
  • how it will be taxed
  • how quickly you will be able sell if you need the money.

Indirect investing

This is where your money is given to another party who buys and sells investments on your behalf. Some of the main ways Australians can gain exposure to international investments indirectly include:

Managed funds

In a managed fund your money is pooled with that of other investors. An investment manager then buys and sells shares or other assets on your behalf. Some managed funds focus on specific regions such as Asia or Europe, while others focus on specific asset classes in certain regions. Managed funds can be an effective way to gain diversified exposure abroad. For more information see managed funds.

Exchange traded funds (ETFs)

These are a type of passively managed fund that can be bought and sold on the share market. ETFs aim to track the performance of a certain market, index or a specific asset class such as international shares or global property. ETFs often have low fees and can provide low cost exposure to international investments. For more information see exchange traded funds.

Australian companies with overseas exposure

Another way to gain international exposure in your portfolio is to invest in listed Australian companies with international operations. Many companies listed on the Australian Securities Exchange (ASX) have international operations and investments.

If you are considering an international investment or want to gain exposure to overseas markets, make sure you compare the direct and indirect investment options available. Think about the time it will take to manage the investment, the cost, level of expertise required and level of risk when deciding if a direct or indirect investment is best for you.

Risks of international investments

Investing internationally carries all the general risks of the underlying investments, but there are also other risks that are unique to overseas investments that you need to assess. These risks include:

  • Currency risk - Foreign investments are usually held in the currency of the country of origin. Income and capital gains or losses must be converted into Australian dollars (AUD) which means you are exposed to the risk of movements in exchange rates. If the value of the AUD rises against a particular currency, the value of investments held in that currency will fall. Conversely a fall in the AUD will increase the value of your investments.
  • Political, economic and regulatory risk - International investments are subject to country-specific risks such as political, economic and regulatory changes. While it might be easy to keep up with these changes in Australia it may be harder to keep track of what's happening in other markets. You will also need to understand the laws and regulations relating to foreign investments in the country you are investing in.
  • Selling time - If you hold investments in other countries or in managed funds that invest internationally, it may take significantly longer to sell these assets. Some countries may also restrict the amount or type of securities that foreign investors may purchase. Where these restrictions exist, they can make it significantly more difficult to buy and sell assets in those markets.
  • Additional costs - International investing can be more expensive than investing in Australia. In some countries there may be unexpected taxes, such as withholding taxes on dividends or rental income and transaction costs such as broker's commissions. Managed funds that invest overseas may have higher fees and expenses than funds that invest in Australia.
  • Information - It can be difficult to find up-to-date information on foreign companies and assets. Some foreign companies may not provide investors with the same type of information as Australian companies do or they may have different legal and accounting standards.
  • Legal remedies - If there are problems with your overseas investments you may have to rely on the legal remedies that are available in the country where you invest.

If you are concerned about any of these risks you should seek professional financial advice before you invest overseas.

How to research international investments

Before you invest it's important you research the country and market you are investing in, the political and regulatory environment and the foreign investment laws.

Some good sources of information that can help with this research are:

  • Financial adviser and broker reports - Some advisers and brokers provide research reports on particular foreign companies, individual countries or geographic regions. This can help keep you up to date with rapidly changing market conditions.
  • Foreign company reports - If you are investing in a listed foreign company, they are generally required to provide financial reports, such as half-yearly and annual reports. Look at the company's website or ask your broker for a copy of the reports.
  • Foreign regulators - The securities regulator in the country you are investing in may be able to tell you information about a particular foreign public company or market, foreign investment laws and warnings about scams to look out for. You can find a list of the international securities regulators on the International Organization of Securities Commission's website.
  • International bodies - international bodies including the International Monetary Fund, the World Bank and the Bank of International Settlements have a large amount of data and research about different countries. These can help give you insights about how those markets are performing and global trends that could impact your international investments.

Tax on foreign income

If you are considering international investments, it's important to know how foreign income is taxed and how this will impact your investment returns.

If you are an Australian resident for tax purposes, you must declare income from overseas investments in your tax return. This includes income from offshore bank accounts, income from international shares, rental income from overseas properties and capital gains on overseas assets. If you have already paid foreign tax on your international investments, you may be entitled to an Australian foreign income tax offset.

See the ATO's webpage on foreign income for more information on the tax treatment of international investments.

Australian investors can invest in overseas assets in many ways and international investments can be an effective way to diversify your portfolio. However overseas investments can also involve greater risks than in Australia. If you are unsure whether investing overseas is right for you, seek professional financial advice.

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Last updated: 24 Oct 2018