It’s a big world out there. While investors should maintain their core holdings in strong, U.S.-based companies with reasonable growth and earnings trajectories, the highest upside potential may not come from the domestic markets. Foreign sectors may be able to provide a superior growth narrative due to myriad factors. One particular market that has intrigued investors lately is Australia.
As you know, the land Down Under isn’t just renowned for its beautiful landscapes and iconic tourist destinations. Instead, Australian stocks offer exposure to several key industries. According to the Australian government’s Trade and Investment at a Glance 2019, the country’s top 20 exports total $297.3 billion AUS. As well, Australia’s gross domestic product in 2018 totaled over $1.43 trillion USD.
You may be surprised at how diverse its export economy really is. While commodities and energy make up the lion’s share of the exporting allocation, Australia has a very robust services sector, primarily in technology and telecommunications. Also, its agriculture and food industries are sizable, thanks to its vast territory and abundant natural resources.
Further, by tapping into Australian stocks, you enjoy indirect exposure to pivotal markets. The nation’s biggest two-way trading partner is China by a country mile. However, its second- and third-biggest partners are Japan and the U.S., respectively. Plus, 3.6% of its international trading portfolio is with emerging market India.
Australia’s Golden Dreams
The allure with Australian stocks to buy right now is its commodity sector. As you’re well aware, gold has skyrocketed this year, with the novel coronavirus pandemic, economic fears and social unrest providing a three-part impetus. Sure, gold has taken a hit recently. But more than likely, this is part of a healthy corrective dynamic against the framework of a wholesale shift to precious metals.
The main evidence is in the rise of the commodity itself. When you get down to the brass tacks, commodities are “dumb” – they don’t pay dividends and they don’t represent ownership in a productive enterprise. They just sit there, a simple subject of supply and demand.
Furthermore, the Wall Street Journal chronicled the mad rush of suddenly displaced American workers into the stock market. Thanks to intuitive and popular trading apps like Robinhood, anybody can live out their Gordon Gekko fantasies. While speculative stocks have taken up most of the attention on these millennial-friendly platforms, there’s not much room to gamble on gold directly – as stated above, it’s just a commodity.
And yet, demand is incredibly strong because of the three aforementioned catalysts. In addition, the U.S. government’s response to the coronavirus pandemic is not cheap. To guide our economy away from the present minefield, the Federal Reserve has few options other than to adopt a dovish, accommodative policy. Hence, this is very positive for Australian stocks levered to gold mining.
Lithium Soaring in Relevance
Don’t forget another commodity that’s also generating headlines – lithium. Though a volatile market, there are significant opportunities for Australian stocks exposed to this wildly relevant sector. Case in point is the burgeoning electric vehicle market. Despite a severe economic crisis pressuring the international community, EV leader Tesla (NASDAQ:TSLA) has seen a mercurial rise in its valuation.
Sensing opportunity, many other companies, including China’s popular Nio (NYSE:NIO), has tossed its hat into the ring. Despite the broader threats associated with worsening U.S.-China relations, this could turn out to be a net positive for lithium. When China first attempted to build combustion-engine cars, its end results were catastrophically bad.
However, EVs haven’t so much changed the game but upturned the entire automotive industry. With far fewer moving parts, EVs are inherently more reliable than their combustion-engine counterparts. Out of nowhere, China is now one of the leaders in advanced auto technology when previously, it was a laughingstock.
Naturally, American and other pro-western nations’ automotive industries will not take this challenge lying down. Therefore, we could easily see an EV arms race, one fueled by both capitalism and nationalistic sentiment.
And that bodes very for Australian stocks that are tied to this incredibly relevant commodity. But how does one go about acquiring such investments?
The Rundown on Buying Australian Stocks
While the concept of international investing may seem daunting at first – as humans, we’re biased toward investing in markets that we know – the advent of consumer-friendly platforms has greatly expanded our choices. For the beginner investor, you generally have three basic approaches:
- Exchange-traded funds featuring your target stock/investment sector
- American Depositary Receipts (ADRs) of dual-listed companies in major exchanges (i.e. NYSE, NASDAQ)
- ADRs in over-the-counter (OTC) markets
For most investors, the easiest way to buy Australian stocks – or any country’s publicly traded equity shares – is via an exchange-traded fund. Nowadays, you can find several ETFs to suit your particular investing narrative. In this case, the iShares MSCI Australia ETF (NYSEARCA:EWA) is a popular choice thanks to its high volume.
The advantage is that you can buy EWA or your target ETF like you would a stock. Further, ETFs feature diversified holdings by nature, mitigating the impact of volatility because the pain is spread across several names. After all, international stocks tend to be more volatile than their domestic counterparts. Additionally, Australia is highly dependent on its commodity and energy exports.
However, the flipside is that in a sector bull market (such as the one we’re seeing in gold), ETFs also mitigate the upside. Plus, you may see names in your ETF that you don’t care for. And the ones you do like are not guaranteed to be in the fund indefinitely.
Thus, for targeted Australian stocks to buy, investors should consider American Depositary Receipts (ADRs) of blue-chip dual-listed companies. According to the American Association of Individual Investors, an ADR is defined as follows:
a negotiable certificate that trades like a common stock and is issued by a U.S. bank; it represents shares of a non-U.S. publicly traded company. ADRs are priced in U.S. dollars, and dividends are paid out in U.S. dollars. The actual shares of the foreign company are held by a custodian bank in the company’s home country, subject to the terms specified on the ADR certificate.
Large-scale corporations, like Rio Tinto (NYSE:RIO) and BHP Group (NYSE:BHP) are dual-listed in both the New York Stock Exchange and the Australian Securities Exchange (ASX). One of the tremendous benefits to ADRs is that they trade just like an American stock. That means, you don’t have to wake up at potentially an ungodly hour to get your orders in. Further, you generally avoid the more complicated regulatory issues associated with foreign investments.
While these are clear advantages, one issue is that an ADR listing in a major U.S. exchange is legally onerous and expensive. That’s why most major ADRs are blue chips or common household names. However, this dynamic typically precludes smaller names with much higher growth potential.
For such circumstances, foreign companies that wish to dual list can avoid the high costs and paperwork of major U.S. exchanges and go over-the-counter, colloquially known as the pink sheets. If you watched The Wolf of Wall Street, you know what I’m talking about – OTC markets are notoriously the home of penny stocks.
However, many legitimate organizations distribute their shares in OTC exchanges. For foreign companies, the motivation usually stems from avoidance of higher regulatory standards and costly listing fees as opposed to a nefarious rationale.
Again, for the American investor, the benefits are the same as major ADRs: you buy Australian stocks by your rules and on your time. While incredibly convenient, the problem with OTC markets is their lack of volume relative to their major exchange counterparts. Because of that, you lose access (barring unusual exceptions) to derivative markets – if the primary market already features shallow volume, why bother with ancillary markets?
Also, let’s not forget the ultimate whammy: some Australian companies may only be listed in their home market. And these names could represent the greatest growth opportunity. What to do then?
U.S.-Based Foreign Trading Platforms to the Rescue
If you’re truly committed to the full spectrum of Australian stocks, you don’t have to end your story with the limitations of ADRs. Instead, you can open a brokerage account that allows access to international markets.
For those new to the game, you should consider vanguard institutions like Charles Schwab. On its website, the company has a section dedicated to international stocks. As its marketing literature rightly points out, we live in a globalized economy. Therefore, it’s impossible not to be impacted by major geopolitical events.
By investing in key international markets, individual traders have an opportunity to profit off their high-conviction arguments. As well, you should theoretically enjoy the volume levels of “home support,” which potentially opens access to derivative markets.
Of course, some of the benefits that are associated with ADRs may be reversed. By investing in Australian stocks via U.S. brokerages, you’re playing by their rules and their time zone. For some Americans, that might be just perfect. If you live in the west coast, you’re limited to trading between 6:30am to 1pm in the domestic market. That’s a drag, especially for the worker bee.
But since the ASX opens at 10am Sydney time, that converts to 5pm in the west coast. Thus, when you get off from work, you have ample time to trade.
Nevertheless, investing directly in Australian stocks carries several risks. In particular, Charles Schwab notes that “International stock exchanges have their own rules and regulations for participating countries and organizations. Changes in governance and financial policies can create limitations on the access rights of foreign investors.”
Also, the company writes “Taxes on international investments are often taxed at different rates than domestic holdings. Similar to regulatory changes, some foreign nations may also impose additional taxation on foreign investors.”
There’s no way around it – if you’re truly gung-ho about Australian stocks, the direct play brings more regulations and paperwork, along with volatility risks. However, many high-profile U.S. brokerages give you the option, which by itself is worth its weight in gold.
Can You Invest Directly with Australian Brokerages?
At this point, most prospective buyers of Australian stocks will be satisfied with their access. However, to get around some of the rules and regulations associated with foreign investing, many have raised this question: can American investors open accounts with Australian brokerages or trading platforms?
From my research, practically speaking, the answer is no. For instance, one Australian brokerage I reached out to mentioned that the company doesn’t provide services to U.S. clients because of regulatory challenges. A different broker gave me a flat no while others refused to acknowledge my correspondence.
While you may wish to mitigate your paperwork, someone must do it. And that usually involves an Australian broker, which many do not want to play ball.
That doesn’t mean all hope is lost if you wish to go this route. However, many international brokerages only support limited access to American investors. For instance, the U.K.-based IG Group has a significant presence in Australia. However, U.S. clients only have access to forex trading through IG, which is beyond the scope of this article.
If you really want to deep-dive Australian stocks, investors should consider Interactive Brokers Group. Though U.S.-based, the platform provides full access to Australian markets. As well, if you’re ever interested in obscure sectors, such as the Hungarian or Polish stock markets, Interactive Brokers provides that choice.
A Matter of Preference
Ultimately, what avenue you take regarding Australian stocks to buy comes down to personal preference; specifically, what attributes are most important to you. I believe that most American investors are best served, at least initially, with major ADRs. In my view, they represent the most straightforward approach to international trading without the headaches and complications.
However, to experience the full flavor of Australia’s investing opportunity, you need legitimate international access. Here, likely the most reasonable approach is to open an international account with a vanguard U.S.-based securities brokerage. If you decide on this route, I encourage you to ask as many questions as you can with your prospective broker.
Remember, it’s your money. You deserve to know exactly what will happen to it.As of this writing, Josh Enomoto is long gold bullion.
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