Can foreigners invest in ASX shares? Yes, but with a handful of caveats and considerations

Nick Sundich Nick Sundich, April 8, 2024

Can foreigners invest in ASX shares? The simple answer is yes, although it isn’t as simple for them as it would be for local investors.

 

Can foreigners invest in ASX shares?

Again they can. Obviously this is a different question to whether they should from their perspective. And it will be different for a foreign retail investor compared to a large institutional investor. Takeovers of companies need to be approved by the Foreign Investment Review Board (FIRB) and they can also be blocked at the government’s command if it is not in the national interest.

Just look at the current situation with Austral (ASX:ASB), the ASX’s only shipbuilder for the Australian navy. It has received a takeover bid from Korea’s Hanwha Group, but is unwilling to entertain it, not even to give it due diligence, because the company is not confident that bid would be approved. Hanwha obviously has stated publicly that it thinks it could be suitable, and noted it has obtained approval before.

Nonetheless, the failed bids for Ausgrid, AHL, Icon Energy and Northern Minerals demonstrate that regulators can be tough to please.

 

Retail investors have it easier

But of course, not all foreign investors are large institutions. Some are ordinary retail investors wanting exposure to opportunities not available on their home markets. The ASX is the first major stock exchange to open each day by virtue of its location – sorry NZX but we are not counting you.

From a tax perspective, foreign investors would like things Down Under for several reasons. One is that they are not liable for Capital Gains Tax (CGT) on shares. This is a deliberate strategy by the Australian government to encourage foreign investment in Australian shares. Foreign investors don’t get the same treatment in respect of other assets, particularly property.

 

Who’s Frank and why is he giving credits?

Another is the system of franking credits, not only do they not need to pay tax on shares with franking credits, but they do not even need to declare them in their tax returns.

The time zone can either be an advantage or disadvantage dependant on where investors are. Those in Asia would find it an advantage, but those in Europe and the Americas wouldn’t so much.

Another thing that could be a blessing or a curse is the currency. North American and European investors are finding the Aussie dollar cheap right now – others like New Zealand and Japan, not so much.

Finally, we observe that the resources sector makes up a significant proportion of the market. Many markets in the Asia-Pacific have far fewer resources stocks, and virtually no mainstream markets have the diverse range of junior explorers that the ASX do. Look at the decision of Newmont to list on the ASX after buying Newcrest, rather than just delist those shares and run. It saw full well that there was a big opportunity in having a dual listing in Australia in addition to its New York listing.

 

The reality

Nonetheless, Australia is just one of many markets around the world. Big institutional investors have plenty of other markets to choose from, and they are probably looking for individual companies first with a country-agnostic viewpoint, rather than thinking where to invest.

Australia will always be big, although never be as big as the New York and London markets and may hold some good companies, but other markets will have their fair share. And we think local investors should not have anything to fear in foreign retail investors participating in the local market. Yes, they have a right to be jealous of the CGT treatment, but there is more good than bad that comes from increased market participation.

 

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