Look offshore for the best investment opportunities

Looking abroad for investment opportunities in international markets not only opens the door to a wider opportunity set but gives diversification benefits for investors.

The S&P500 IT index, which includes familiar household names Microsoft and Nvidia, has returned 27 per cent year-to-date. Picture: Getty Images

Against a backdrop of elevated inflation and higher interest rates, investors have been eager to see how these challenges might be reflected in local company results.

On balance the results have broadly been solid, with earnings beats outnumbering earnings misses by a ratio of 4:3.

Dividends have also been impressive: beats to misses have run at better than 3:2, with companies such as Woolworths, JB Hi-Fi and Super Retail announcing special dividends while payouts from Commonwealth Bank, Fortescue and Woodside were at the top end of their targeted range.

Looking forward, management teams have been cautious on their earnings outlook, though.

We see an even split between those making forward earnings guidance upgrades versus downgrades for the 2025 financial year.

Higher volatility was a feature during the recent period. Historically, there is always positioning going in and coming out of reporting season that drives short-term share price reactions. Slight beats were generally rewarded while slight misses were sold off aggressively, reflecting an optimistic investor bias conditioned by soft landing expectations. Markets were also coping with a 5 per cent macro-driven equity sell-off in early August that full recovered in subsequent weeks.

One of the key themes that has become increasingly apparent in the last few reporting periods has been the dispersion of stock and sectors returns.

Structural changes, short covering and scarcity of choice has seen investors crowd into names looking for exposure to certain themes. An example is the result of WiseTech. Management guidance for the 2025 financial year, on higher margin and new client wins, put a rocket under earnings forecasts and valuations, which saw the stock up 16 per cent on the day of its announcement. WiseTech’s strong rise, while extreme, portrayed the broader trend of price rises seen in Australian equities, with the ASX200 up around 6 per cent, year to date, and close to all-time highs, pushing valuations into historically rich territory.

On balance the results from local companies have broadly been solid, with earnings beats outnumbering earnings misses by a ratio of 4:3. Picture: NewsWire / Gaye Gerard

Dispersion at the sector level was even more pronounced. The Australian IT sector has been one of the clear winners of the current reporting season, up +41 per cent year-to-date and on a nosebleed price-earnings multiple of 142 times. By comparison the S&P500 IT index, which include familiar household names Microsoft and Nvidia, has returned +27 per cent year-to-date, on a more palatable P/E ratio of 32 times and with stronger earnings growth. WiseTech’s result highlights how scarcity and crowded trades can drive dispersion and distort Australian sector returns and opportunities relative to global peers. Looking abroad for investment opportunities in international markets not only opens the door to a wider opportunity set but gives diversification benefits for investors. We think the idea of seeking quality growth should apply more broadly to investors’ equity holdings, and global IT, especially US tech, represents an alternative for Australian investors.

The global tech sector’s reporting season is coming to an end and it looks set to post another impressive 24 per cent year-on-year earnings growth in the second quarter. Recent earnings growth for the US tech sector has largely been driven by firms with competitive advantages and exposure to structural drivers that have enabled them to grow and reinvest earnings consistently over time. Nvidia, viewed as a bellwether for the growth story of artificial intelligence and the overall market, delivered another earnings beat in its second-quarter results, surpassing consensus estimates for both earnings per share and revenue. The chipmaker’s revenue increased by +122 per cent, year over year, to $US30bn. Without taking any single-name views, the second-quarter US earnings season suggests the underlying earnings backdrop remains supportive where tech has featured prominently.

After its recent underperformance, with major tech benchmark indices down significantly recently from their recent peaks, we see an attractive entry point for a high-quality sector with exposure to structural growth opportunities, including AI. And therein lies the opportunity. Australia is less than 2 per cent of listed equity opportunities by global market capitalisation, so looking abroad immediately opens up a new, wider and more diverse universe of stocks.

In contrast to Australia, the global IT sector is underpinned by a very different industry profile. The global IT sector goes beyond the creation of “hardware” or “software” but extends to development of cutting-edge technologies such as chip design, cloud computing, autonomous technology and artificial intelligence.

AI is likely to be one of the most profound innovations and one of the largest investment opportunities in human history and it’s hard to imagine how it won’t become the “new electricity” entrenched in our daily lives. AI technologies are not well represented in the Australian market. Most investments carry an element of risk, including the risk of losing capital invested. As such, diversifying (appropriately) globally could help reduce some of the stock and sector dispersion seen so prominently during this reporting season while potentially reducing overall portfolio volatility. At the end of the day, fundamentals trump uncertainty and while volatility is likely to persist, long-term investing success is more closely tied to the quality of earnings, the strength of the business model and appropriate valuations.

Before making any investment decisions, understand your objectives and risk tolerance and seek professional advice.

Jack Coleman is an investment specialist at UBS Global Wealth Management.