International Investors need to consider the macro-economic environment and jurisdictional factors as critical elements in determining where and how they invest. The longer the timeframe for investment, the more important this becomes.
Creating intergenerational wealth is a mission that requires considerations that extend beyond short-term trading. It means increased consideration for jurisdictional issues, which in turn influences the currencies that one invests in.
A common – and true – statement that fund managers make is ‘past performance is no guarantee of future returns’. Yet understanding the environmental qualities that foster wealth creation is an excellent way of maximising your opportunities. At the very least, it helps manage risk and, at best, ensures that your capital is in the best place to prosper.
Simply put, you want your money to be where the action is. Where entrepreneurs are active, and where capital markets are strong. Where the future is being created.
The Power Formula
Recently, I was listening to John Mearsheimer, a political scientist, discussing the basis for countries accumulating power. Power is a function of population and wealth. That is, the more people a country has, and the wealthier it is, the more powerful this country will be. Though Mearsheimer was talking in the context of international political relations, (and you can read more about his political realist theories in his excellent book “How States Think”) it got me thinking about how this formula plays out over time, and what the implications are for international investors.
Just as this formula supports political and military power, it also reflects the strength of a national economy. This, in turn, supports the value of that country’s currency and provides an arena to attract and implement capital investments. Thus begins a virtuous circle, which in turn attracts entrepreneurs and early-stage companies, creating a melting pot that, ideally, incubates new companies and creates wealth over time for investors.
Remember too, from my recent posts, that a strong economy is a critical driver of a strong currency, another important consideration for investors. But how can someone assess these aspects?
I’m obviously looking at this from the perspective of Australian and Swiss investors. Home country bias is real and also justified. Not only are there usually tax advantages from investing in your home country (e.g., capital gains discounts for Australians, property concessions in Switzerland), but the geographical proximity results in better knowledge about any given investment compared to one located across the ocean.
Comparing Capital Markets
So, how do Switzerland and Australia stack up? Let’s first have a look at the size of their listed entities over time.
I’ve chosen the 20 years ending in 2019 as a good period for comparison, as it would include the tail-end of the tech crash but also avoid the Covid pandemic. And both countries look good – we can see strong and regular growth in the total market cap of listed entities. This speaks to a strong and growing economy, which would also help support the value of their respective currencies.
On just this metric, both would seem a good place for investors to consider placing their capital. Growing capital markets, indicating a robust and profitable environment for entrepreneurs and a financially literate society.
But though these two countries are relatively competitive, how do they look in an absolute sense? Let’s see how they compare against the largest capitalist economy in the world, the United States.
The two are completely dwarfed by the USA. But it is hardly fair – after all, the USA has a much larger population than either Australia or Switzerland. Is it simply a matter of scale, or is the US actually more productive per person?
In the USA, 7 of the Top 10 companies were founded in the last 50 years, and 5 within the past 30 years.
To get an idea, let’s look at the GDP per individual person:
This data surprised me somewhat. I was expecting the USA to have a superior growth rate over the period. Switzerland is clearly the highest (which makes sense given the listed market cap is similar to Australia yet they have a population of only about a third). Importantly, from an investment perspective, all countries show regular positive growth over this extended period of time.
Where the Rubber Hits the Road
So, what does this mean from a practical, coal-face investment perspective? Let’s start by looking at the Top 10 companies in each domestic market:
But what really caught my eye was the age of the companies. In the USA, 7 of the ten were founded in the last 50 years, and 5 of the Top 10 within the past 30 years.
Compare that with Switzerland where only 1 (ignoring mergers) – Glencore started in the last 50 years, and Australia which has only 2: Fortescue and Atlassian.
Further, the USA companies have obviously greater exposure to the technology sector, compared to banking, mining, retail and pharmaceuticals in the other countries. Arguably, this tech sector still has the greater potential for growth.
So what lessons can we take from this?
All three countries are in good shape: Each of these jurisdictions has strong capital markets in proportion to their population.
Individual circumstances hold the trump card: From a strategic asset allocation perspective, your exposure should be influenced by your specific circumstances. For example, Australian shares have a greater emphasis on dividend yield compared to the US. Further, Australian tax residents benefit from dividend imputation. These two benefits may have greater appeal than potential higher capital growth that would be obtained in US equities.
It’s hard to go past the USA for innovation: Let’s face it: the greatest proportion of the world’s innovators go to the US to create and grow their enterprises. You need to be there to participate in this, whether as a VC partner or a simple holder of ETFs.
Finally, if we return to Mearsheimer’s perspective, the USA remains the standout economy for investors. It has the absolute scale and an environment that fosters entrepreneurship. It is the most likely location to incubate the next entities into the world’s largest and successful companies. This, in turn, will support the value of the US dollar. The USA wins the power equation – at least for now.
The good news is, whether you are a sophisticated investor, or just starting out, there are cost-effective ways for you to benefit from this information. Contact me today if you would like to discuss how this can be achieved.