Australians love Australian stocks, but that affection for the domestic market comes with a trade-off known as “home bias”.

Home country bias is when investors are overexposed to domestic equities in their investment portfolio.

There are both pros and cons for home bias. On the one hand, you can avoid currency by investing on the ASX, there could also be tax benefits to keeping assets within your borders. 

On the negative side, there's the issue of diversification across sectors. The ASX, for example, does not have the same exposure to technology as the US does. An over-reliance on domestic equities in a portfolio can also raise country-specific risk. In poor economic conditions, both our jobs and portfolio could be at risk.

But not all ASX stocks are made equal, and some locally listed companies generate the majority of their revenue offshore.

We've identified three undervalued ASX companies that offer exposure to foreign markets. These aren't the answer to a diversified portfolio, and do not replace direct foreign investment, but could be a way for investors to broaden their exposure to international markets.

When examining the local exchange in this way, two kinds of listings stand out: foreign companies which are listed on the ASX through the exchange’s CHESS Depository Interests (CDI) system, and Australian domiciled companies that generate most of their revenue from markets outside Australia.

In part one of this series, we will first look at ASX CDIs operating under the exchange’s foreign exempt listing framework. CDIs are a way for investors to own a foreign company through the ASX. 

Investors seeking broader exposure to international markets could also consider an ASX-listed ETF that invests in global markets. We identify 3 high-quality options here. 

Unibail-Rodamco-Westfield (URW)

  • Star rating: ★★★★★
  • Geographic Exposure: Europe
  • Morningstar Sector: Real Estate
  • Uncertainty Rating: High

One of Europe’s largest listed retail REITs, Unibail-Rodamco-Westfield first landed on the ASX through its acquisition of Westfield in 2018. However, despite retaining the name, the Westfield-branded Australian and New Zealand shopping centres did not form part of the takeover and remain operated by Australia-based Scentre Group (SCG).

Morningstar analyst Alexander Prineas says URW’s portfolio of shopping centres is among the highest quality in the world and attracts high-quality tenants and high occupancy.

“It's prospects improved markedly after operating conditions normalised in 2022 after the COVID-19 pandemic, but inflation and high interest rates remain a risk for the group's asset disposal and deleveraging plans,” he says.

Further, in light of the group’s ongoing post-pandemic recovery, Prineas says URW shares remain “substantially undervalued”.

“We still think asset sales are needed to reduce debt within a reasonable timeframe, but the ongoing earnings recovery supports our view that URW can reduce leverage even without asset sales.”

“While URW trades at 40% of its tangible book value, it continues to sell assets at roughly book prices, supporting our view that the stock is undervalued”

URW’s ASX-listed shares last traded at $3.58, a 55% discount to Morningstar’s fair value estimate of $7.80 apiece.

Virgin Money UK (VUK)

  • Star rating: ★★★★
  • Geographic exposure: UK
  • Morningstar Sector: Financial Services
  • Uncertainty Rating: High

Virgin Money UK offers investors access to the UK banking sector through its Australian CDI listing.

The UK-based full-service digital bank should not be confused with Virgin Money’s local Australian offering, which was acquired by Bank of Queensland (BOQ) in 2013.

Virgin Money UK was instead formed in a merger between CYBG PLC and Virgin Money. CYBG PLC, operated the UK-based Clydesdale Bank and Yorkshire Bank brands which were previously owned by National Australia Bank (NAB).

Because of the operation’s NAB roots in Australia, shares remain dual-listed on the ASX and London Stock Exchange.

Currently, the business is in the process of phasing out the regional Clydesdale Bank and Yorkshire Bank brands in favour of the digital Virgin Money UK brand.

The banking stock is currently trading in four-star, “undervalued” territory following the global financial sector rout and Morningstar analyst Nathan Zaia says the share price paints too bleak a picture, given the bank’s prospects.

“While Virgin lacks the scale of major U.K. banks, management is executing on building digital product offerings coupled with rewards, evidenced by growth in customer deposits and credit card balances,” he says.

Shares in Virgin Money UK last traded at a 27.5% discount to Morningstar’s assessed fair value of $4.00 a share.

Block Inc (SQ2)

  • Star rating: ★★★★
  • Geographic exposure: US
  • Morningstar Sector: Technology
  • Uncertainty Rating: High

Shares in US tech giant Block Inc (SQ2) first landed on the ASX after it acquired buy-now-pay-later giant Afterpay in January last year.

The large-cap US multinational was created by Twitter founder Jack Dorsey and operates payment platform Square.

Following the takeover, Afterpay shareholders had their holdings exchanged for Block ‘s NYSE-listed shares which were floated on the ASX via a CDI arrangement. The ASX-listed shares have almost halved in value since the takeover finalised and Morningstar currently rates Block shares as undervalued.

However, Morningstar analyst Brett Horn notes that while shares are screening as undervalued, investors should take note of the stock’s “Very High” uncertainty rating.

“Block is a fast-growing, highly scalable business, which creates a wide range of possibilities. This consideration is the primary factor behind our very high uncertainty rating,” he says.

“Because Block's revenue is directly tied to revenue at its merchant customers, it is sensitive to macroeconomic conditions, and its focus on micro and small merchants magnifies this dynamic, as small merchants can fail in large numbers during recessions.”

Following the company’s latest full-year earnings report, which dropped earlier this month, Horn said the company’s growth remained strong.

“Block continues to see strong growth, with overall net revenue up 26% year over year,“ he says.

“However, we would like to see this growth translate into better profitability. On this front, the quarter suggested some modest improvement.”

See more:

Morningstar's Mark LaMonica and Shani Jayamanne did a deep dive on getting international diversification with domestic equities in this episode of Investing Compass.