Foreign Exchange

How does currency affect my investments

Investors who have monies invested offshore have an additional risk which is currency. Currency can magnify gains or losses on the assets themselves. Sometimes the movement of the currency ends up being more important than the performance of the asset. It is possible to eliminate currency risk by taking out a currency hedge. This is a financial instrument that guarantees that an investor can change foreign money for a certain rate in the future. The problem is that the cost of such hedges can be quite expensive and difficult to manage for private investors.

While currencies can be quite volatile over the short term the long term trends of currencies is more open to fundamental analysis. Two key drivers of a countries currency are interest rates and GDP growth. If both of these are increasing there will be a greater demand for that countries currency and conversley if these are failing the currency will soften. At present NZ’s dollar is strong against other currencies due to our solid economy and relatively high interest rates. While our dollar is likely to remain high over the next 12 months pressure is building for further declines after that.

For your information currency hedging is used across your AMP Super and Kiwisaver funds. This has the effect of smoothing returns.

How to be smart about your money

Buy smart with our high dollar

Regardless of where the dollar goes in the future, New Zealanders should understand their currency is an opportunity to be taken advantage of.  The dollar’s strength is a double-edged sword.  It provides cheap imported goods and makes our cost of living cheaper.  It also puts pressure on interest rates to remain low.

For investors, the high dollar creates conflict.  If, like me, you have kept a proportion of your super fund in international investments for the past decade you will implicitly understand the handbrake this has applied to your fund’s performance – above and beyond the torrid times in equity markets.  Yet, despite all this, and the understanding that New Zealand’s economy is “relatively” stronger than many around the world, it is important to benchmark us against ourselves.

Although, for the time being, the dollar remains relatively buoyant.  The change in sentiment towards the New Zealand dollar will come quickly, when it comes.  And it’s for that reason I continue to think that prudent international investments (as distinct from holding foreign currency, in preparation for your next trip) is a smart play that will lead to improved wealth in the coming decade.  The big question is how to make the investment? The broad stock market, most likely, holds little prospect.

And though many online brokers now provide access to international shares, you need to have strong information lines to be taking on US or European shares directly.  The same could be said about international bonds – with the real problem that these prosper most when interest rates are falling and so their race may already be run.

Managed funds, including your DHB super (assuming you are in a growth or even balanced fund) offer a sizeable exposure to international shares including Commodities, infrastructure and emerging markets.  Alternatively you can use the International share and International listed property securities sector funds assuming you have the risk appetite.