An economist joked that there are two types of currency forecasters: those who can’t forecast the currency; and those who don’t know they can’t forecast the currency.
Three decades of writing about financial markets has taught me the truth in that jibe. Currency forecasting is a mug’s game. Speculating on short-term currency moves is best left to professional traders and banks. Portfolio investors need a different approach.
That’s not to say currency should not be part of your investment consideration. Global equities deserve a bigger allocation in retail portfolios. Too many investors are overexposed to property, local shares and cash, Australian Taxation Office data shows.
Investing in global equities requires taking a view on the Australian dollar’s direction, assuming the investment vehicle used is unhedged for currency movements. Choose hedged global equity funds if you want to eliminate currency exposure from the equation.
I learned about the effects of adverse currency movements the hard way. My portfolio, stacked with unhedged global equity funds at the turn of the century was savaged when the Australian dollar rose from US50 cents in 2001 to almost parity with the Greenback by 2007.
Falling equity prices earlier in the decade and a falling Australian dollar were a toxic combination. A sharp fall in our currency after the 2008-09 global financial crisis partly offset tumbling global equity prices and I eventually sold the funds for a small loss.
My lesson: ensure your portfolio is on the right side of big currency trends and take swift action if not. Uptrends and downtrends in our currency often take years to play through the cycle. Trying to predict where the Australian dollar will be in one month or year is tough; judging the long-term trend is smarter.
My base view for the past few years is that the Australian dollar is in a multi-year downtrend against the Greenback. Readers of this column will recall I was bullish on unhedged global equity exposure, principally US shares, partly because our dollar, then above parity, was primed to fall. That idea was highly profitable.
Our currency fell from US$1.10 in late 2011 to US75 cents and has further to drop. I don’t subscribe to the bears’ view that the Australian dollar will sink to US50 cents in a year or two as commodity prices resume their fall and our terms of trade deteriorate.
Instead, a gradual move to around US65 cents – an important point of technical support on the Australian dollar chart – is a good bet within two years. If that happens, investors in unhedged global equities will be boosted by a lower Australian dollar (assuming equity prices are constant).
Reserve Bank of Australia governor Philip Lowe gave an important speech this week that suggests a lower currency. Lowe said there was no case for a near-term adjustment in monetary policy, implying that interest rates will be on hold for some time yet. Lower-for-longer interest rates will weigh on our currency as investors chase higher relative yields offshore.
Lowe’s view matches my expectation for our economy. As I have outlined for The Bull before, we are in a long, grinding sideways recovery as households and governments repair their balance sheets. Record-low wages growth and record-high household debt will continue to constrain consumer spending.
Thankfully, downturns do not last for ever. The world is enjoying its best period of synchronised growth in years and more of it will eventually filter through to Australia. Higher commodity prices and improved mining activity reflect an improving global economy.
For now, the local picture is feeble wages growth, low inflation and weak pressure to lift interest rates. Higher commodity prices will help our currency, but a widening yield differential (as other countries lift rates while ours are on hold) will drive the Australian dollar lower.
There are several ways for investors to benefit from a lower dollar. The first is buying companies with a higher proportion of offshore earnings, such as Macquarie Group, James Hardie Industries, Computershare, Brambles, Amcor and CSL.
I’m not wild on this strategy, principally because using equities to back a currency view adds company and market risk. And companies such as CSL have multi-currency revenue and cost exposure that makes for complex Australian-dollar exposure.
Another option is unhedged actively managed funds or index funds, such as exchange-traded products. The iShares S&P 500 ETF, for example, is unhedged for currency moves. But care is needed buying US equities, priced for perfection during this bull market.
A better option for those seeking pure dollar exposure is a currency ETF. Read up on them before investing as they have different features, benefits and risks to share or bond ETFs.
The ASX-quoted Betashares US dollar ETF provides low-cost exposure to the US dollar relative to the Australian dollar. If the US dollar rises by 10 per cent against our dollar, the ETF is designed to rise 10 per cent. The ETF’s management fee is 45 basis points annually.
Simply, investors who believe the US dollar will rise against the Australian dollar (as our currency falls) can use the Betashares ETF to back that view. Investors can buy or sell the currency ETF, much like they would shares, via ASX.
The ETF Securities ETFS Physical US dollar ETF is another option. It, too, provides exposure to a rising US dollar relative to the Australian dollar and charges 30 basis points annually.
Chart 1: ETFS Physical US dollar ETFSource: ASX
Those with a more aggressive view could use the BetaShares Strong US dollar (hedge fund), which is designed to magnify a 1 per cent rise in the US dollar relative to the Australian dollar into a 2-2.75 per cent rise in the ETF. I’m wary of geared ETFs. Remember that leverage works both ways, magnifying gains and losses on currency movements.
• Tony Featherstone is a former managing editor of the BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider the appropriateness and accuracy of the information, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at Nov 23, 2017.