Investing in Belgian shares: the dangers of too many domestic securities

At the height of the coronavirus pandemic, you may have noticed that many supermarkets and other shops encouraged us to buy Belgian products. Buying locally benefits a country's economy. And, of course, it helps to reduce our ecological footprint. However, for investors it is seldom a good idea to buy locally as much they can.

1. Not enough international spread

More than 40,000 companies are listed worldwide. About 170 of these are listed on the Belgian stock exchange. That is less than half a percent. If you buy only companies listed in Belgium, you expose yourself to a high concentration risk.

It is like this: although some of these Belgian companies have worldwide operations (for example AB InBev and the Sofina holding company) or operations elsewhere in Europe (for example Xior and Cofinimmo), others operate manly in Belgium (for example Proximus, Telenet Group and Home Invest Belgium). So if the economic situation deteriorates in Belgium, its neighbouring countries or Europe as a whole, this may have a substantial impact on your Belgian investments.

2. Sector imbalance

You will also run a sector distribution risk if you invest solely in Belgian companies. Suppose you have invested in the entire Bel20, which covers the 20 largest Belgian companies based on factors such as market capitalisation. This would mean that (only just) 1.25% of your investment is associated with the technology sector (Melexis). By way of comparison, if you invest in say, the EuroStoxx 600 (the 600 largest European companies in terms of market capitalisation), 7.7% of your investment would be technology-related. If you invest in the S&P500 (the 500 largest US companies in terms of market capitalisation), you reach the other extreme with a 27.8% investment in technology (situation on 31 August 2021).

In other words, investing in different regions also spreads the risks specific to certain sectors better. It means that you do not invest too much or too little into one sector or another.

3. More cyclical stocks

Another concentration risk is the type of shares that are listed on the stock exchanges. In Europe (and in Belgium, too), the emphasis is mainly on cyclical shares in sectors such as banking and car manufacturing. Those companies will do well in times of economic growth, but will perform less well if the economy has slowed down.

4. Concentration risk for all your assets

Imagine you work for a Belgian employer, you have a home in Belgium and you mainly invest in Belgian companies. If you invest both your human capital and your financial capital in the same market, you effectively expose yourself to a possible double blow. Imagine that some economic upheaval causes you to lose your job and see your portfolio shrink at the same time. That is also why it is a good idea not to restrict your investments to Belgium and/or Europe alone.

Why do investors have home country bias?

A long time ago, long before the arrival of the Internet, it was easy to explain why investors were not as interested in other countries. Reliable information was often difficult to access. It therefore seemed logical for investors to buy the shares mainly of companies they knew well and on which they could get the most information. Today, these barriers have largely disappeared (although your search engine may also filter out information based on your region or your search history).

There is also another, financial technical reason why investors are still opting for shares closer to home. For example, if you are interested in investing in Japanese and American shares, you will first have to convert your euros into yens and dollars. And then, when you sell your investments again, you have to convert those currencies back into euros in order to be able to spend them. So there is a currency risk. The transaction charges for foreign shares also tend to be higher than those for domestic or European shares.

If you invest in foreign shares that pay out dividends, there is also a chance that you will be taxed twice. You may first be taxed at source in the country of origin and then again in Belgium (some double taxation treaties, however, allow you to avoid this double taxation).

Consequently, there are still good reasons to invest only in Belgian companies or in your own currency. However, these advantages do not entirely outweigh the disadvantages and risks.

How strong is home country bias?

Strange as this may sound, home country bias is an international phenomenon. Belgian investors tend to favour Belgian shares (just look at Keytrade Bank's most traded shares). French investors go for French shares. Japanese investors go for Japanese shares. The list goes on. If people can see or even touch what they are investing in in their daily lives, this tends to reassure them and even generate a sense of pride. However, such reassurance can be very misleading.

Vanguard research from 2021 shows how strong home country bias can be. For example, France’s weighting in the MSCI World index is 3.36% but, on average, 22.8% of French investors' portfolios are French shares. French investors therefore have 6.8 times as many French shares in their portfolios as the global average. Some countries have even higher home country bias levels: Germany (x 7.8), Switzerland (x 10.8), Canada (x 16.7), Australia (x 30) and Italy (x 31.3).

How do you protect yourself against home country bias?

In itself, there is nothing wrong with adding a touch of patriotism to your portfolio. But do not go overboard. Home country bias may lead to excessive portfolio risk, exposure to higher volatility and missed opportunities.

You are therefore advised to build a well-diversified foundation in your portfolio first with shares from North America, Europe and Asia. You can supplement this foundation with shares from emerging countries in other regions (Latin America and Africa) and/or Belgian shares. Or with thematic investing, for example. Opting for a tracker or investment fund also allows you to spread your investments across different regions easily without buying hundreds of different shares.