The insights you need to know trading US shares, and how this compares to trading Asian shares, especially and including China
‘Home country bias’ is a big deterrent to investing in international shares. Many first-time traders prefer to keep their focus on their country of origin, even though studies show that diversifying your portfolio to global markets minimises your risk and improves your returns. Of course this bias isn’t restricted to beginners. There are people who’ve been trading for years but they still restrict themselves to local markets.
Many governments encourage home country bias, because it improves the local economy. These governments therefore implement policies and strategies in favour of home-based investment. For example, in Australia, residents get tax cuts for investing within the country. In the US, corporate tax was recently decreased from 35% to 21%. These measures are aimed at local investors, but they can inadvertently benefit an international stock broker.
A good time to invest in the US
Aussie tax cuts encourage foreign investors to look into the Australian market. In the same way, the current US tax cuts can drive Aussies to look yankee-ward. Taxes are often the biggest expense for any business entity. By cutting this expense, the company’s profit margin rises, and this is great for investors, because part of this extra profit will be paid out as dividends and stock-holder bonuses.
Similarly, it’s a common practice for American companies to take their operations offshore. They shift factories to countries where labour is cheaper and taxes are lower, because this increases their profits. Usually, they leave earned cash in those countries. However, Trump’s tax reform for 2018 has two key elements. In addition to the tax cut we’ve just mentioned, there’s now a territorial tax system.
This essentially means if you make money outside the States and bring it back to the US, you won’t be taxed for the incoming money. This encourages multinational organisations based in the US to bring their earnings back home. They will now invest in local markets, giving more vibrant returns for anyone that buys shares in those multinationals, including Australians with an eye on the American market.
Look to the east
They say East or West, home is best. However, in terms of portfolio diversification, you want to look East and West, as well as retaining a small home advantage. Asian markets are becoming more vibrant, especially China, so it’s worth dipping your financial toes in the Orient. If you take your cue from big banks, they’re still leaning Eastwards.
Strategists from Bank of America Merrill Lynch believe emerging stocks in Asia will double over the next two years. 2017 showed low volatility in the DOW, but 2018 has already produced record highs in Asian equities. The MSCI Asian Pacific Index has had a 28% jump since the year began, and is expecting its highest gain since 2009.
China is looking particularly promising, especially since political will is boosting financial advantage. The 19th National Congress brought out some issues that have a direct effect on the economy. There’s been a push to minimise credit, increase environmental protection, and tie equity and forex pricing more closely to supply and demand.
At the end of 2017, several Chinese indexes were on a high. January’s HSCEI was up 15%, and while it dropped in January, it was still up 5%. The Hang Seng was up 10%. The last quarter of 2017 showed a rise of 6.8% in GDP, and China’s currency is up at 6.3 against the US dollar. All these are good signs for investing in China.
Trading in the US vs China
There are concerns about a potential trade war between the US and China. President Trump’s tax review was intended to draw more investment towards the US, and the US has already levied higher taxes on washing machines and solar panels from China in a bid to reduce imports and boost the local manufacturing industry. These raised tariffs are likely to extend to other Chinese products.
As an investor, this doesn’t have to be an issue for you. You can invest in both markets and benefit from any projected outcome. Find an online trading platform that will allow you to observe, review, and trade in both markets on a single screen, and at subsidised transaction rates. It’s an excellent diversification strategy for 2018, and you get the best of both worlds.