4 reasons you might consider investing in the Australian economy this year
With rising interest rates and strong commodity prices, the ASX could emerge as a strong performer for local and international investors alike.
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The ASX often gets overlooked, even by Australian investors.
But although Australia's stock market only represents around 2% of global equity markets, it shouldn't be ignored.
In fact, the ASX is arguably a bit of a hidden gem in world markets. So let's take a look at some of the key benefits offered by the ASX.
1. Market diversification
Just about any seasoned investor will emphasise the importance of diversification in investing.
Different industries and even different exchanges can move on substantially different cycles. So when an investment is doing poorly or simply holding steady, diversified investments can help stabilise and potentially offset your wider portfolio.
The ASX is no exception on this front. Smart investment can help reduce the risk of foreign exchange exposure and help provide balance to a portfolio.
"The ASX has often underperformed against the US market, given its lack of exposure to 'growth' stocks over 5 to 10 years," Josh Gilbert, market analyst at eToro, says. "But that doesn't necessarily tell the whole story. In the last 2 years, the ASX 200 has outperformed the S&P 500, in part due to its defensive focus."
Of course, this doesn't mean all ASX stocks are created equal. You still need to be selective when you're making investment decisions.
A new addition to the range is the AussieEconomy portfolio, which invests in stocks across a diverse range of Australian industries. For investors looking to get started with the ASX, portfolios like this can serve as an excellent entry point.
"The ASX has provided a haven for investors over the last 2 years in turbulent markets," Gilbert says. "But it has the potential to offer a lot more than just a haven for investors in the future."
2. Higher dividends
Australian shares are well-known for paying a higher dividend yield than traditional global shares. For investors who are focused on generating direct income from shares – as opposed to generating profit through regular trading – this can be an attractive prospect.
"There is arguably no better major market globally for income than the ASX 200," Gilbert says.
"The index had the largest payer of dividends in 2022, with BHP. The index itself also paid out a record $97.7 billion in dividends."
If you've been paying attention to the ASX, you'll see this is consistent with the make-up of the market itself, too. The ASX is considered highly liquid – in fact, the top 200 companies on the ASX are considered among the most liquid in the world.
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3. Franking credits
Of course, dividend payments also mean tax implications.
However, a number of Australian companies offer franking credits in order to help prevent Australians from being taxed twice on their dividends. A variety of trading platforms – including eToro – also support this process.
It is important to note that not all dividends will be fully franked.
Some may not be franked at all, while others are partially franked. This means that a portion of the tax has been paid, but not all of it.
You should always speak to a financial professional to determine your tax liabilities when it comes to trading.
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4. A range of growing sectors
Australia is home to a wide range of industries, and accordingly has a number of growing sectors.
In March 2023, we provided an overview of some of the stocks to watch on the ASX. But these aren't the only opportunities to be found.
"There is still plenty of optimism from investors over the re-opening of China, so materials and energy will likely continue to perform well," Gilbert says. "As the world continues to decarbonise, there is a wealth of opportunity from Australia's natural resources, such as lithium. That will attract international investors as well as local ones."
Gilbert also points to the tech space as an area of particular interest.
"Tech stocks had a pretty rough 2022," Gilbert says. "But valuations are more attractive this year. So at the moment, technology has been one of the best performing sectors so far this year."
This, Gilbert notes, is largely based on the hope that central banks globally and locally will be slowing down their financial tightening cycle.
"The macro backdrop will also be a huge driver if inflation begins to fall and the RBA slows down its hiking cycle," Gilbert says. "This may see investors further rotate out of more defensive assets like healthcare and into technology stocks as they take on more risk."
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Preparing for investing in the ASX
Gilbert notes that whenever you're entering a new market – whether you're investing for the first time or already have experience under your belt – it's worth testing a strategy in advance.
"Demo accounts can be an effective way to test strategies without placing your funds at risk," Gilbert says. "Platforms like eToro offer the ability to experiment with trading different commodities and markets. This way, you can build confidence and get a feel for what may work or not work with real-world data."
Importantly, Gilbert notes, it can also help you determine whether specific markets are a good fit for your investment goals.
To find out more about trading stocks, make sure you check out our step-by-step guide.
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