Diversifying offshore

16 Dec 2013 90 month(s) ago

OffshoreThe high $A suggests that looking offshore has its attractions. But the fate of Australia's currency is determined by forces larger than the performance of the local economy, making its direction unpredictable. And there are risks in overseas markets.

OffshoreIf there is one probability in the market, it is that at some point the Australian dollar will become weaker. It is already down almost 10% from its peak against the greenback, and as that economy recovers, it is likely to get weaker again. The Aussie is the fourth most traded currency in the world, far in excess of what the Australian economy's proportion of the world economy. So what happens to the $A is mainly determined by forces that have very little to do with our trade or economic performance and everything to do with the strategies of central banks and traders playing the global capital markets.

But the Trade Weighted Index, which is a reasonable proxy for what the dollar is actually "worth", suggests that the $A should be about 80c against the $US. That means that investing offshore could get a double whammy effect. The investment may rise in value in its own right (hopefully). And its worth in Australian dollars will also rise as the $A falls.

The AFR today describes what can be done to invest internationally:

"Most banks offer access to international markets via online broking. So with a couple of key strokes, an investor could add some large companies that operate in sectors almost non-existent here and which benefit from much larger markets than Australia.

"According to comparison site, the options and costs between share-trading platforms vary significantly. Some may only trade in certain countries and offer limited certain stock options.To buy shares in the US, CommSec charges $US65 ($72) or 0.75 per cent (whichever is greater) while E*Trade charges $US59 on trades up to $10,000.

Intelligent Investor research director Nathan Bell suggests investors stick with the big companies and the names they know. His US stock picks include two of the banks, Bank of America and Wells Fargo. Insurance giant AIG is another favourite, as is pharmaceutical and medical device company Hospira. In the United Kingdom retailer Tesco is a preferred company.

Prescott Securities senior economist Alan Hutchinson says investing in companies like Apple, Google, Microsoft, Johnson & ­Johnson and Exxon Mobil gives exposure to brands with products that are either consumed, applied, utilised, watched and enjoyed by Australian’s every day.

“They not only have sales and profits driven from mature markets, they are also benefiting from the faster-growing emerging markets,” says Hutchinson."

This graph by Morningstar shows the balance of international and local investing. The biggest providers of international exposure are Platinum and Magellan:

The strength of Australia's currency is a good reason to look offshore. But it should also be said that US share prices are looking very high on an historical basis -- much higher than average valuations in Australia. That may imrpove as the American economy recovers. But investing overseas is not without its risk.
The Economist describes what is an ambiguous picture:
"Investors’ returns over the last 15 years have not been great. But there are a number of markets that look overvalued on an historical basis. American equities are trading at a cyclically-adjusted price-earnings ratio of 25, according to Mr Shiller. This is much higher than the historic average of 16.5 but below the levels reached in the great peaks of 1929 and 2000. Corporate profits are also at their highest level relative to GDP since the second world war, suggesting further growth is unlikely.

Mr Shiller is not yet ready to declare a bubble in American equities, however. There is nothing like the same excitement about shares that was seen in the late 1990s; net flows into mutual funds only just turned positive this year. Another measure of public indifference is that CNBC, a television station that tracks the financial markets, suffered its lowest ratings since 2005 in the third quarter.

Some would put government bonds into the bubble category: last year, yields in some markets reached the lowest levels on record. Buying bonds when yields are less than 2% has in the past led to heavy losses. Again, however, debt markets do not look too frothy by other measures. There is little talk at dinner parties of the massive profits to be earned on sovereign bonds. The biggest buyers have been central banks; there may be a problem when they try to unwind their purchases, but that moment does not look imminent."