This week Robert Swift takes a look at the currency debate that has been raging recently. Robert takes a look at what has happened so far and how he expects equities to react accordingly. Is it time to increase or decrease your weighting towards international investments?
Investing internationally can expose you to currency risk. If the AUD$ falls against other currencies then you benefit to the extent that the value of your investment rises when translated back into AUD$. On the other hand if the AUD$ rises then the value of your investment is reduced by the extent of the decrease in the foreign currency. It is important to note that you haven’t lost money if you do not sell the position. It is only a “loss’ or ‘gain’ on the basis of adjusting prices to current market values.
Currencies fluctuate and in the short run can do so for random and illogical reasons. In the long run (5 years +) they tend to follow a more logical path which is determined by relative competitiveness in traded goods. Countries with more debt, more inflation, and less capital investment tend to have currencies which structurally decline in value.
The AUD$ has recently risen by about 5% against the US$ and the global equity portfolio has about 50% of its assets in US$ denominated stocks. This has reduced the value of the portfolio.
We consider below the reason for the increase and, more importantly, if it will it continue. Are we going to see a repeat of the commodity boom from China which drove the AUD$ over parity, and at the time caused all sorts of currency experts to predict that the AUD$ would remain there! As we said – currencies fluctuate in the short run and are notoriously hard to predict.
While equity prices could be said to behave in a predictably irrational fashion, currencies tend to behave in an unpredictability irrational fashion.
So what happened and why do we think this is nothing to worry about? You shouldn’t sell international equities nor be afraid of owning many foreign currencies.
Why do we think this is a temporary surge and one should remain invested in unhedged international equities?
Most importantly the AUD$ is not a cheap currency. The OECD calculation of the PPP fair value of the A$, an anchor price around which news flow drives it up and down, is about $0.71. We attach that chart below.
Consequently the AUD$ at a little above fair value is not likely to rise much more. With the Australian dollar at levels above 80c, one should be investing more into international equities to attain better portfolio diversification and to gain exposure to sectors and themes not present in Australia.
Markets & Commentary
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.