Few economic variables have confounded forecasters more this decade than property prices and the Australian dollar. Both have made the alarmists look silly.
But even a broken clock gets it right twice a day and the bears are finding their voice again as capital-city house prices edge lower and the Australian dollar gets the wobbles.
ANZ Banking Group this week tipped falls in Sydney and Melbourne house prices of 10 per cent from peak to trough, and smaller declines elsewhere. That is small in the scheme of price gains this decade but enough to worry those who bought late and are highly geared.
I have not been as concerned about property prices, except for inner-city apartments in Brisbane and other oversupplied markets. Tighter credit standards are weighing on property demand and prices, but the longer-term outlook looks okay.
Like or loathe it, high population growth in East Coast capitals, underpinned by a high migration intake, is a good foundation for property prices. Some argue, with justification, that rampant population growth is akin to a “Ponzi scheme” by inflating demand and lowering living standards. Still, that demand wants to live in inner/middle suburbs in the capitals.
My base case is single-digit falls in property in Sydney and Melbourne before prices move higher again, albeit at a slower rate. History shows East Coast property markets typically experience periods of sideways price movements or manageable declines when housing costs get overheated, before the next move higher. That will be the case again.
I am more bearish on our currency and explained that view in The Bull in November 2017 in “Declining Australian Dollar Presents Investment Opportunities”. Our dollar has fallen from almost US76 cents then to US73.8 cents. Less than I expected, although the trend is down.
I wrote at the time: “I don’t subscribe to the bears’ view that the Australian dollar will sink to US50 cents in a year or two …. 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.”
I retain that view: an Australian dollar gradually edging lower against the Greenback over the next 18 months towards US60-65 cents. That will create opportunities for currency traders or portfolio investors who have unhedged currency exposure to offshore assets.
Pendal Group this week argued our dollar could fall to the (mid-60s) within 12 months and other analysts are lowering their currency targets. The United States’ aggressive trade wars, and President Trump’s unpredictability on this issue, have driven our currency to a one-year low.
US monetary policy is the Australian dollar’s main menace. A hawkish US Federal Reserve will continue to raise interest rates, probably faster than the market expects, until signs emerge that higher rates are hurting the US economic recovery. Our rates are going nowhere, meaning a widening differential between US and Australian rates will weigh on our currency.
From a technical (charting) perspective, the Greenback appears to have broken out of resistance (against a basket of currencies) and the Australian dollar looks to have breached key support levels. Our dollar might be on the verge of its next leg down after being range-bound for 2016-18. The risks all point to the downside, in my view.
As to playing the trend, currency Exchange Traded Funds (ETFs) are the easiest way to benefit from a weakening Australian dollar for those seeking pure currency exposure. Buying Australian companies with offshore earnings adds company and equity-market risk.
The ASX-quoted Betashares US dollar ETF provides cheap exposure to the US dollar relative to the Australian dollar. If the Greenback 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.
I nominated this ETF in my previous story on the Australian dollar for The Bull in November 2017 and it has done well since.
Chart 1: Betashares US dollar ETFSource: The Bull
Investors who believe the US dollar will rise against the Australian dollar (as I outlined earlier) can use the Betashares ETF to profit from 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 also provides exposure to a rising US dollar relative to the Australian dollar and charges 30 basis points annually.
Those seeking aggressive exposure to a falling Australian dollar could use the BetaShares Strong US Dollar 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.
Geared ETFs have extra risk and suit experienced investors. Leverage works both ways, magnifying gains and losses on currency movements.
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on 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 June 22, 2018.