However, when it comes to clout or equity market prowess, Australia lags major developed players like the US, UK and Europe. Roughly 1/15th the size of the US economy [2], Australia represents a fraction of the global economy and accounts for less than 2% of the global equity market [3]. 

Yet for most Australian investors, a large proportion of their portfolio is concentrated in Australia - a small segment of the global capital market. 
 

The familiar is comforting but potentially not optimal

It’s natural to go with what you know and what is familiar. That large bank that you see every day or that large retailer where you shop could seem like relatively safe options. But these companies may not necessarily be industry leaders – not when compared to their counterparts on an international scale. 

This is not to say that Australia does not have some great companies – it does, but by looking only at corporate Australia, investors are overlooking the other 2,800 companies represented in the global equity index [4]. In JP Morgan's opinion, doing so could lead to unnecessary concentration risk.

The top 10 companies in the ASX 200 represent 48% of the entire Australian sharemarket by market capitalisation [5]. This means for every dollar invested in a passive Australian index tracker, 48 cents goes the 10 largest companies. 

Even in the US, where concern around market concentration is the hot topic, the top 10 stocks in the S&P 500 account for around 33% of that index –lower than in Australia [6]. 

Concentration is the opposite of one of the foundational principles of investing – diversification. 
 

Diversify. Diversify. Diversify.

Equity markets do not move in sync. What drives one market may not drive another. The Australian equity market is heavily driven by the materials (miners) and finance (banks) sectors. These two sectors account for over 50% of the ASX 200 index [7]. This makes the equity market very sensitive to factors that affect the demand and supply of housing and commodities. 

In JP Morgan's opinion, investors can balance their sector exposure by diversifying across geographical regions or increase their exposure to a different sector if they feel it may offer a better growth prospect. 
 

Made in Australia? Think again. 

Any list of the most common consumer brands may contain only a few, if any, companies headquartered in Australia.

Of the world’s 100 most valuable brands, none are in Australia, and a significant number are found in Asia, Europe and the U.S. [8].

These markets are home to many companies that have become clear global industry leaders. They provide luxury products that cater to rising middle class wealth. They are at the forefront of innovation in life sciences, addressing the deteriorating health and rising obesity of nations. 
 

Then there is Artifical Intelligence (AI)

AI may or may not take your job, but it will create at least 12 new job categories [9]. The potential for generative AI to transform the economy and spawn future innovations should not be underestimated. It may end up joining the ranks of the steam engine and electricity as the next “general purpose technology” given the boundless possibilities of real-world applications. 

For those seeking to harness this exciting investment theme, they will need to look beyond Australia’s shores. While the technology sector represents about 3% of the Australian market [7], it makes up more than 20% of the global equity benchmark [10]. In JP Morgan's opinion, a passive exposure to the Australian equity market can leave investors underexposed to this transformational technology. 

Going global 

For investors wanting to overcome home bias and tap into world-changing mega trends, JP Morgan considers that they should invest globally. But how? Investors may consider these options:

1. Go direct. Buying specific companies directly is one option, but requires a lot of research on company fundamentals, transaction costs and potential tax implications for different jurisdictions (depending on an investor’s own personal circumstances).
   
   
2. Go passive. Investing in a global equity index tracker, while cost-efficient, means investors are bounded by the make-up of the index rather than by the merits of each company. 
   
   
3. Go active. Active Exchange Traded Funds (ETFs) are a low-cost means to access global markets with the help from investment professionals. Rather than purely tracking an index, an experienced portfolio management team selects the best companies within each industry while seeking to keep the overall exposure to the market unchanged. Like passive ETFs, active ETFs are liquid, transparent and can be traded on an exchange. 
   [Editor’s Note: Like all investment products, active ETFs have pros and cons. As an actively managed fund, active ETFs can potentially outperform or underperform their benchmark index. Active ETFs typically have higher fees than ETFs that replicate a benchmark index and may potentially have a more concentrated portfolio with fewer securities held, compared to an index-tracking ETF]

Regardless of how an investor chooses to invest, JP Morgan considers that the investment principles of diversification and reducing home bias are key to building a portfolio. 

For those seeking growth opportunities from transformative themes that will shape the world, JP Morgan's view is that they consider looking beyond “Australian made”.  

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[1] Source: The World Bank. Data as of 2020

[2] Source: International Monetary Fund. Data as of October 2023

[3] Source: FactSet, MSCI. Data as of 6 March 2024

[4] Source: FactSet, MSCI, Data as of 6 March 2024

[5] Source: FactSet, MSCI, Data as of 6 March 2024

[6] Source: FactSet, Standard & Poors, Data as of 6 March 2024

[7] Source: FactSet, Standard & Poors, Data as of 6 March 2024

[8] Source: Ranking by market value. Best Global Brands 2023 ranking, Interbrand. Data as of 21 November 2023

[9] Source: Forbes, 23 Jan 2024, https://www.forbes.com/sites/bernardmarr/2024/01/23/12-new-jobs-for-the-generative-ai-era/

[10] Source: FactSet, MSCI, Data as of 6 March 2024