With record highs in our Australian dollar and underperforming international equities, it may be the time to benefit from investing overseas. Tony Featherstone the former managing director of BRW magazine explores the opportunity below.

STRATEGY: INTERNATIONAL EQUITIES RISING APPEAL

A higher Australian dollar is good news for those thinking of buying offshore.

The Australian dollar’s rise is creating more pain for local investors who already hold foreign stock and have unhedged currency exposure. All things equal, a strengthening Australian dollar dampens returns because offshore assets are worth less in Australian-dollar terms. The currency’s strength and weak equity markets in developed nations have resulted in unhedged exchanged traded funds, such as iShares, and unhedged active managed funds posting mostly negative annual returns over three years.

But an easing Australian dollar against the US dollar would be good news for local investors with unhedged currency exposure. Few economists expect the Australian dollar to retreat sharply against the greenback any time soon however, our currency’s tailwinds are firmly in place: key commodity prices are rising, and the interest-rate differential between Australia and the US should widen, with local rates likely to rise before year’s end or early next year, compared with US rates seemingly on hold for some time yet. A higher global risk appetite is also good news for a “commodity” currency, such as the Australian dollar.

Domino effect is worldwide

The US dollar has its own problems. The Federal Reserve has signalled its intention to renew quantitative easing to boost sluggish growth. This form of monetary policy essentially prints money, thus increasing US-dollar supply and putting more pressure on the greenback. Its devaluation is having a domino effect worldwide, forcing other central banks to keep interest rates lower than they might like, to ensure they are not at a currency disadvantage that could hurt their export sector and undermine economic recovery.

Media talk of global “currency wars” suggests the Australian dollar’s rise, at least in the short term, is not over. A higher dollar hurts exporters as well as Australian companies with significant offshore operations. But by making imports cheaper, a higher Australian dollar does some of the Reserve Bank’s job for it in the fight against inflation. Moves by central banks worldwide to keep interest rates on hold suggest hugely accommodative monetary policy will be in place for longer. This is good for equities, provided inflation does not get out of hand as rising commodity prices force up food and energy costs.

When the Australian dollar’s supercharged rally eventually slows, conditions for local investors to buy foreign stock in unhedged currency terms might be the best for some time. Certainly, sophisticated investors appear to be reducing their currency hedging to take advantage of an expected easing in the Australian dollar, according to recent stories in financial publications such as BRW magazine.

No rally lasts forever

An easing Australian dollar and rising global equity markets could provide a two-pronged boost for investors who hold foreign stock in unhedged currency terms. But do not read that as a recommendation to buy foreign shares or products that provide such exposure. Do further research or talk to your financial adviser about whether now is a good time to increase international equity allocations in portfolios. Remember that short-term currency moves are notoriously hard to predict.

Also, no rally lasts forever. After such a huge rise in the Australia dollar, it might be time to consider more offshore assets in anticipation of an Australian dollar trading between US85 cents and US95 cents in the medium term. Developed economies still have plenty of problems, but look in better shape than a year ago. Incredible monetary and fiscal support is slowly reflating these economies and their private sectors are taking the lead, instead of government, in boosting growth.