An Aussie Perspective on Investing With a Global Focus

In this segment from the episode of Motley Fool Answers, Alison Southwick and Robert Brokamp are joined by Scott Phillips of The Motley Fool Australia to dig into some global investing trends that American investors may be overlooking because of our U.S. focus.

And make no mistake, it's natural to be America-centric -- at least half the market cap value in the world trades on U.S. stock exchanges. But that still leaves half a world to profit from. Among the areas they discuss are what's happening in China, the (unusually) synchronized growth of the global economy, Australia's long run of expansion, and a problem that both our nations share: stagnating wage growth.

A full transcript follows the video.

This video was recorded on March 6, 2018.

Alison Southwick: What is the first global investing trend that you think our American investors, here, have maybe overlooked or you think we should take a look at?

Scott Phillips: I won't come and tell you guys what you do look at, don't look at, or what you overlook and don't. I'm going to tell you about some of the global things I see. You can tell me whether it's something that you guys very clearly know about, in which case I'm wasting your time, or I'm actually adding some value, so here's the chance. No. 1.

Southwick: You're coming in so humble.

Robert Brokamp: Yes, with that accent you've already got the value.

Phillips: Setting low expectations. Only upside from here. China continues to grow really strongly. If we go back 18 months -- maybe even two years ago, now -- the story was all about what if China has a hard landing. What's going to happen when China is dead? Is there enough foreign currency around? When the market's got nothing to worry about, it finds something to worry about, and it was worried about China for a good four or six months. China's stock market was all over the place. The currency was under pressure.

The downward course of other things took our attention. The good news [and it won't get reported if it is good news] is that China continues to boom. The economy, itself, still growing about 7%. You can choose to trust or not trust the Chinese numbers, but the economy is growing, and the imports into China and the outputs from China are keeping the world turning. That's a really positive story.

Whether that's demand for iron ore, which we kind of like in Australia, because we've got lots of that stuff, China's manufacturing, China's exports, the Chinese consumer is growing. So, what's going to power the world economy for the next 20 or 30 years as well as American economic growth is Chinese economic growth, and that's a really really good story.

Southwick: What are you telling Australian investors as far as your advice for investing in China, and does that advice translate to Americans?

Phillips: I wouldn't invest directly in China, right now. I think there's a decent amount of sovereign risk. We've talked a lot already about risk and return, so far. Leverage is one of those. The other is taking on more risk than you need to unless you have a portion in your portfolio and you want to take some risk on. There may be some value there. I know there are some recommendations in Motley Fool services here in America which have Chinese-based companies or companies that do business in China.

For us in Australia, we've got some really good opportunities that are Australian companies doing business with China, and so that's the opportunity, there. We've got everything from vitamins companies to infant formula and milk companies. We've got fruit and veg growers. China is demanding more and more products from Australia. It used to be just iron ore, so we'd dig it out of the ground and send it over there. They'd make steel and cars and send it back to us. But now it's very much the Chinese consumer is on the rise, and that's a really good news story for Australia, as there are a whole lot of ways to play that growth.

The other thing is Chinese tourism. We are getting 15-20% a year growth in the number of Chinese tourists coming to Australia. That's really cool. So, local tourism operators. Local transport operators. There's some really nice ways to play that without having to invest in China, itself.

Southwick: Let's talk about your second trend.

Phillips: No. 2 is synchronized global growth is a thing. Did you synchronize growth? Get a run here a few months back?

Southwick: I don't even know. I know what those three words mean, and together I can guess what we're talking about.

Phillips: There you go. I may know more about it. I'm sorry.

Southwick: But I would love to hear yours. You know, I have my understanding of it, but I would like to hear yours.

Phillips: No, you first. Really! I'm kidding. I'm kidding.

Southwick: Well, it's synchronized. Global growth is synchronized.

Phillips: It's growing globally. Synchronizedly. Yeah. The story is that all of the major economies of the world -- the first time since what you guys call the Great Recession [we call it Global Financial Crisis, which is another thing that's different] -- are growing at the same time, and it's really the first time. Europe is on the improve. China is growing strongly. You guys are growing really strongly. Australia is kind of OK and catching up.

But when you get global growth synchronized across the world, you are going to get really magnified returns. That's the good news, so tick one in the box. I guess if you want to see some other side of it and be a big contrarian or see what that means, it probably means that when all the tide is all the way in, it's only got one way to go next, and that's out. So, I'm not predicting a crash. Even if I thought it might be possible, I wouldn't do anything differently. But just thinking about that, the great news is everyone's growing. That's awesome. And we're still recovering, frankly, from the Great Recession. But as we get to the top of that curve, you figure that at some point in the future, growth will be weaker than it is today. So, just be a little bit mindful of that. Don't overegg the pudding when it comes to margin loan. Don't expect that growth can be extrapolated forever. Those kinds of things you've got to keep a bit humble, a bit mindful, a bit thoughtful about what's coming next.

Brokamp: Overegg the pudding.

Phillips: Do you like that?

Brokamp: Is that a phrase you're familiar with, Alison?

Southwick: No, but I also know how to make a traditional pudding, so I can understand what you're trying to say.

Phillips: With eggs, right? Put too many eggs in the pudding, you spoil it. I'll stick to investing, not cooking.

Southwick: No, that's fine. Here in America I feel like we've had people saying a bear market is around the corner for the last eight years. Well, 10 years. Or nine years. I can't do math. Basically...

Phillips: A long time.

Southwick: ... it's been a really long time. Is it the same way in Australia and elsewhere in the world?

Phillips: Oh, yeah.

Southwick: Where as soon as there's even slightly improved economic conditions, people are like, "Eh, ain't going to last."

Phillips: And again, we keep coming back to Warren Buffett, because he knows this stuff. He is Brother Warren. And he's got his thing. That's the story. The market climbs a wall of worry, which is a horrible horrible place, but it's kind of true. "Oh, maybe it's going to fall. Maybe it's going to fall. Maybe it's going to fall. " You look back 10 years. Everyone who was dooming and glooming throughout that entire period -- from those who were saying a double-dip recession in 2009 and 2010 -- then it was everything else was going to go wrong.

You know what? Eventually, they'll be right, and by the time they're right the market might have doubled or tripled, and the cost of being right is actually missing out on truly significant compound gains over time.

As investors we ride those waves. That's how you get the returns. You don't get it by trying to predict, and guess, and whatever. Yes, the bears are right once every seven, 10, 12 years. The cost of being right, though, is really really expensive. And so, yes, absolutely. There are people always saying...

I'll get into Australian housing in a minute, but the housing market is really hot in Australia. And so, since 2010 or 2011, they say, "The market's going to crash. The market's going to crash." Maybe it will, eventually, but it's probably tripled since then. So, if the cost of housing falls 30%, you're still doing better to have bought 10 years ago than have worried about when the next crash was going to come.

Now, that doesn't mean you should be flippantly buying anytime, but again, we go back to the dollar-cost averaging that we talked about before, which is keep buying where you see value. Ride the wave. Keep adding. Keep adding. The benefit of that is you end up adding more money when share prices are lower, and a little bit less or buy a few less shares when the share prices are higher. You're doing yourself a favor on the way through.

Southwick: Actually, that is a good segue, because I believe your next point is about Australia's impressive economic growth.

Phillips: I'm catching on with this thing, aren't I? I'm doing all right.

Southwick: You're doing so good.

Brokamp: You are doing fantastic.

Phillips: Segues are everything. So, let me do a bit of flag-waving, all right? You guys are fair.

Southwick: Oh, we're Americans. Puh-lease.

Phillips: So, I'm going to put the little Australian flag up..

Southwick: You think you know how to wave a flag.

Phillips: I'll do my best. We have had a record unbroken run of economic growth without a recession. We're now 25-plus years without a recession...

Brokamp: That's amazing.

Phillips: ... which is awesome. Now, the downside of that is we kind of forget what a recession is, so we start to get a bit silly and take risks. That's the downside. But the good news honestly -- I'm supposed to sit here and say Australia's so great. That's the way we've done it. We've been incredibly, incredibly, incredibly lucky.

When you guys suffered through the Great Recession, China's demand for iron ore was going through the roof at exactly that time, and so just as the consumer was falling apart [just as banks were falling apart], China had this thing. "Hey, guys. Send us out a couple of ships of iron ore, will you?" And as much as digging red dirt out of the ground is not very value-adding, it was enough to keep the Australian economy on an even keel. We had one quarter of negative growth and then back at a positive growth again, and that was all on the back of the mining boom at exactly the right time.

If it had come a year-and-a-half earlier or a year-and-a-half later, we would have been in a massive, massive hole. It just so happened that it came at exactly the right time. We had a mining bust a couple of years later, and the housing boom was taking off. So, you can kind of string enough of these together you're looking pretty good. If they had come at different times if they're overlapped, it would cause an enormous spike and an enormous crash.

So, let's put it down to four-fifths luck and maybe a little bit of greatness for ourselves. But other than that, the good news is if the boom keeps going. And with the synchronized global growth that I talked about, it's kind of not a really good reason for it to end anytime soon. Of course, we never know when it's going to end up or else we'd do something about it, so it's always possible, but the good news is it still looks pretty good. Not as good as you guys, but doing pretty well and the economy is in pretty good shape.

Brokamp: One of the reasons that I am happy to have you on the show is that one of the things I've talked about, off and on over the past year or two, is it might be a good idea to be investing more overseas, and the typical U.S. investor is pretty U.S.-focused. Even among Fools, we're pretty U.S.-focused. What's the typical Australian investor like?

Phillips: We're kind of the same, unfortunately. As much as you guys are saying, "Invest inside the U.S.," we're saying, "Invest outside Australia," and I've got to say we've got more reason to do that than you do, because you've got A, half of the world's stock markets and values and B, a very broad range of really high-quality companies in a whole lot of industries.

Australia is largely miners and banks. We have four really big banks. We have two really big miners and a couple of supermarkets and that's about 60% of the Australian market by market cap. There's 1,500 companies, but all the values are in those big, big, big companies and not much else. And so, we spend a lot of our time saying to our members, "Please go and look outside Australia. We're 2% of the world's market. There are many more opportunities out there."

If I said to you, "You can have anything you want, but only look in this 2% of the shop." You'd say, "I want to look in the rest of the shop. Thanks very much." And you walk in a supermarket or a clothes store and say, "I want to pick 2% of the clothes." You can choose from those. You've got to leave the rest alone. No one inside thinks that's great. But as investors, as you know, Bro, there's that home market bias, so we say, "Well, it's in Australian dollars and it's our time zone. I know the companies." And I kind of get that.

On the other hand, we all use Facebook. We use Google. Most of us use Amazon. Netflix. They're obviously the big ones, but Apple. Everyone's got an iPhone in Australia. We know all these companies, and Australian investors just haven't quite got over the hump, yet, a little bit like U.S. investors going overseas. We haven't got over the hump of saying, "You know what? There's some really great companies outside of Australia. We really should be making the effort."

Brokamp: Interesting.

Southwick: And your final trend that you want to share is actually one that we all share.

Phillips: Yes, I've chosen these in a different or maybe the Americans might'nt know so well. This is kind of one that you guys have experienced and we're experiencing, as well, and these, at least for now, another bit of wind at investors' backs. That's that wage growth is really hard to come by in Australia, just as it is here. I've been really following the news, here, and wages growth is not happening in the U.S. It's also not happening in Australia.

That's kind of tough for a whole lot of reasons, and if we want to spin some off of [...] policies -- and all sorts of the fun stuff -- Alison, you'll hang around for that.

And I want for our listeners -- what I will say is if you are an investor, you've been way, way, way oversharing in the spoils of that. And so, there is and probably for a reasonable amount of time remains to be all of the economic growth in the country is going to the owners of capital. That means shares.

Again, we could argue the reasons why and what we should do about them. In the meantime, that's where the money is going and that's where the growth is accruing to. Again, another really strong reason to be owning shares.

Brokamp: It's really interesting. Obviously, politics, here, in the U.S. has gotten very contentious. Something like that. Then we think of so much of what's going on in America as a U.S. issue, but a lot of it is a global issue. The whole idea of productivity. Technology putting people out of jobs and keeping wage growth low. It's not just a U.S. issue.

Phillips: No, that's right. And there's also, I think, to some degree, China for a very long time exported deflation. Things got cheaper because China made more of them and made them more cheaply, so you could buy a Chinese television cheaper than an American-made television or an Australian-made television. It keeps prices low, and as consumers we benefited from that for probably three decades.

And so, we never really give that credit because there's a really what I say is diffuse benefit. We all benefit a little bit from it, and that's great. There's some really concentrated costs, because people have lost jobs, particularly manufacturing and that sort of stuff. So, we feel that. We don't really feel the benefit.

I think to some degree we're seeing the move toward more wage parity around the world and without getting really wonky about this stuff, as that move happens, that's why it's harder for Australian and American workers to get wage rises, because a lot of the jobs, a lot of the goods are being sourced somewhere else where wages are lower and there's that wage arbitrage. We kind of fight it for a while, but as you say, technology its policy; I think it's just the reality of the globalized world simply saying, "Well, you can't justify..."

And again, I'm not saying it's right, but unless governments step in or do something about these things, the reality is that low-wage countries are going to get a higher share of the economic pie when it comes to some of that low value-add stuff, like manufacturing that can be done much cheaper overseas.