Don’t get the wrong idea that recent volatility in all markets means you should be doing nothing to deal with your investments.
Certainly volatility is indicating fear about the current outlook for equities.
Bonds don’t look too good either as interest rates rise.
Can we really be confident about rising earnings beating consensus forecasts?
For the time, being in cash is always attractive for part of your portfolio. (Better to make nothing than lose hard won gains elsewhere) .
We don’t believe the TV commentators who tell us that money has to go into equities because it cant go into bonds.
Interest rates are very low and asset prices are very high.
The answer, in part, is a very much overlooked asset class.
Currencies provide diversification, yield and an offsetting impact to pressure on US company earnings as a result of a rising US Dollar.
Home bias is so evident in many portfolios.
Currencies Are Driving Investment Markets
The only place that investors have really made money in the past year or two has been in picking the currency in which they have invested and keeping the money in cash.
It surprises us that very few advisers or funds managers actively use currencies as an investment strategy. Or that TV commentators are unaware that professional investors actively use currencies to make money.
Take the Australian Dollar. Two years ago one US Dollar bought one Australian Dollar ( approx). Then the US Dollar started climbing. One US Dollar now buys 1.40 Australian.
Australian investors in US Dollars have made about 40 per cent on their money providing they kept it all in cash and earned nothing in US Dollars.
By comparison, US investors in Australian Dollars have lost 40 per cent over the same period ( or made 40 per cent if they went short).
But what happens now ? We reckon it will be about two years before commodities related currencies like the Australian Dollar the Canadian Dollar and the Brazilian Real recover.
Meanwhile, anyone planning an overseas holiday knows just how cheap it is now to travel by comparison with a few years ago.
The same goes for investment.
Currencies As An Investment Strategy
Lets not throw the baby out with the bathwater. Currencies are risky and do require a several year time horizon. We love yield which will always partly mitigate capital losses as a result of volatility and over a longer period of time can eliminate it.
Do we think that you can make 40 per cent again on Australian Dollars ? Yes, it is certainly possible but we have no idea when. And meanwhile the US Dollar could continue climbing when rates are raised which will make it even tougher to beat earnings forecasts.
Meanwhile, you can still get at least two per cent on Australian fixed interest AAA rated and at least a five per cent yield on top rated banks and industrial stocks down under.
If you wish there are plenty of Exchange Traded Funds that will achieve the same result and are quoted in US Dollars and listed on a US exchange.
So you are paid to wait and maybe spend some of the money on a trip downunder.
As usual the most important decision is the asset allocation decision which is very specific to your circumstances, goals and objectives.
The bottom line.. Get ready to buy cheap foreign currencies and keep the money in AAA rated foreign interest bearing securities.
John Kimber