Microsoft, Amazon, Facebook, Google, Walt Disney, Coca Cola, Tencent, Alibaba, Nike, McDonald's, Visa, Tesla, Netflix, Spotify, Sony, Samsung, TSMC, Johnson & Johnson, LVMH, Salesforce. All massive global organisations, with incredibly strong brands, across a broad range of exciting growth industries. Huge opportunities. I do not believe you would find anything near an equivalent business to any of those listed here in Australia. So why, when the world is changing so rapidly, are most investors sitting on their hands holding 5 banks, 3 mining companies, a couple of retailers and Telstra? The reality is that if Australian investors do not have exposure to international shares going forward, their investment portfolio will be left behind over the long term. There are a few reasons for this.
Firstly, as I alluded to, there is very little genuine diversification in our market compared to the global market. The share market here is dominated by a handful of stocks big banks, big miners, Woolworths, Wesfarmers, CSL and Telstra. The ASX200 is made up of 30% financials and 20.3% materials. In fact, the 12 biggest companies by market capitalisation on the ASX represent about half of the entire market capitalisation of the stock exchange, or about $1 trillion out of the $2 trillion worth of companies listed on the ASX.
Secondly, Australia is also small, really small. The ASX accounts for about 2% of the global share market. A lot of big fish in a small pond. This dynamic makes it more difficult to find stocks that are great businesses as well as undervalued. Everyone knows about every stock. But there are great companies and opportunities across the world that many are missing out on. Unless companies are operating as global businesses, and in 2021 that is entirely possible, then many companies here are limited to a market of 25 million people. Stock market investors need to think much more like venture capital investors going forward and look at businesses that are global and scalable.
Thirdly, asset prices here will continue to be forced up by sheer weight of fund inflows in the years to come. As it stands, there is just so much money in the superannuation system that it is distorting valuations of companies. This will only get worse in the years ahead. Currently, there is almost $3 trillion in the Australian superannuation system. That is more than the entire value of the Australian share market which is worth about $2 trillion. Additionally, there is about $120 billion being added each year in new contributions to the system. That is a huge amount of new cash that needs to be invested. A good percentage of which will be mandated by the super funds to go into the biggest stocks in the country. This is going to become an increasing problem for valuations, fund managers and ultimately investors.
Finally, the opportunities across the rest of the world are very different to those you can access here. There are entire industries and subsectors of industries that simply do not have a meaningful presence here in Australia. Whether it is the pharmaceuticals, technology, cybersecurity, or renewable energy the leading companies in the world are typically not found in Australia. There are no companies you can effectively include in an Australian focused portfolio as a substitute for exposure to the blue-chip companies I listed at the start of the article. You simply miss out. There are even greater opportunities being missed internationally at the mid cap and small cap end where the global leaders of tomorrow are emerging.
It has never really made any sense to me that most Australian investors invest such a high proportion in Australian stocks. While there is a level of familiarity and comfort derived from investing where you live, as technology makes access to international markets more efficient and affordable and research commoditised, it can no longer be ignored. In the decade ahead, diversification away from the Australian share market will be critical. Not only to reduce exposure to a concentrated number of stocks in a small local market, but to access the incredible opportunities increasingly available to all investors across the world.
This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.