International equity markets and global investment dynamics

International Equity Markets

Residential investment property performed better than all investments in the last decade. Australian bonds were the second best performing asset class returning 6.4% p.a. Australian shares were the third highest with 6.1% p.a (Australian Securities Exchange, 2012). Within the same period, the Global Real Estate Investment Trust (REITS) outperformed the Australian REITs. Unhedged oversea shares achieved the lowest return of any asset class over the 10-year period. Had any investor hedged his overseas shares investment he would have received 3.7% p.a. And 6.7% p.a. over the past 10 and 20 years (Australian Securities Exchange, 2012). These were the results before tax but after costs. The results after tax and after costs for the past decade indicated that the residential property outperformed all other asset classes at the lowest and highest marginal tax rates with returns of 7.2% and 5.8% p.a. respectively (Australian Securities Exchange, 2012). Within that same period, the Australian shares achieved the second highest return of 6.5% p.a. And 4.6% p.a. At the lowest and highest marginal tax rates respectively (Australian Securities Exchange, 2012). For the past two decades, Australian shares performed superiorly over other asset classes at both the lowest and highest marginal tax rates returning 9.0% p.a. And 7.0% p.a respectively (Australian Securities Exchange, 2012). Residential investment registered the second highest return of 8.1% p.a. And 6.6% p.a. At the lowest and highest marginal tax rates respectively. It is projected that the incorporation of borrowing money to invest, residential investment property will continue to outperform Australian shares at both the lowest and highest marginal tax rates (Australian Securities Exchange, 2012). However, extension of data period will make the Australian shares to outperform residential investment property in the coming 20 years. Borrowing money to invest is at times called gearing.

Australian stock market is relatively risky. The risks originate from continued volatility in equity markets driven mainly by international factors like the European sovereign debt issues, concerns over the recovery of the United States economy, and the potential for China to suffer a hard landing in terms of GDP growth. Domestic volatility of Australian domestic market is also partly attributed to the perception that there exists a two-speed economy (Piotrowski, 2013). The volatility of the Australian market environment is referred to as risk-on/risk off. Because entrepreneurship is all about taking calculated risks volatile short-term return patterns should not be use to gauge the Australian stock market as being risky. Such patterns are a normal part of investing in growth type asset classes such as equities. However, it is not prudent to respond to such market movements with knee-jerk reactions.

I cannot personally invest in the Australian stock market because of the correlation that exists between marginal tax rates and the after-tax and before tax returns. Tax definitely makes a significant difference to the final return outcome for various investments. Personal taxation significantly impacts Australian bonds and cash investments (Australian Securities Exchange, 2012).

It would not be tricky combining an investment in the Australian Stock Exchange with an investment portfolio containing mostly U.S. securities because both of these equity markets allow the participation of both private and public companies. Both are listed in the stock market.