March 23, 2020: Live from the desk of our CIO, Piers Bolger

March 23, 2020: Live from the desk of our CIO, Piers Bolger

March 23, 2020: Live from the desk of our CIO, Piers Bolger 150 150 Piers Bolger

Last week was one of the most tumultuous weeks that we’ve seen in financial markets since the worst of the GFC back in 2008. Not only did equity markets continue their March sell off, we actually saw during the middle of the week that bond markets also followed suit, as investors sought the safe haven of cash and were looking to liquidate any form of the investment that they had across their portfolios. Treasury and bonds being the most liquid part of the market also experienced that sell down.

We’ve had some queries from clients regarding whether there is any value that the Australian dollar can bring to bear in a portfolio sense when you’re thinking about investing in offshore markets. It is really important when considering investing in global markets, whether it be bonds or equities, that you consider the impact of moves in the Australian dollar can have on your total return. I just want to highlight this point with the associated chart.

This is the relationship between the Australian dollar and the US dollar, as well as the relationship with the Australian dollar to a basket of currencies of our major trading partners known as a trade weighted index. You can see here that the Australian dollar does move in a pretty volatile manner. The Australian dollar has historically been known as a commodity based currency – whether it be in terms of agriculture or mining exports – and the demand for the Australian dollar is very much to set to commodity prices and the growth outlook on a global basis. You can see through 2008 and 2009, the worst of the GFC, the Australian dollar was sold off as the demand for commodities and related export materials declined. It ramped up again once the growth outlook improved, particularly in relation to Asia and certainly in terms of China, given the demand for coal and iron ore as an example. More recently, we’ve continued to see the Australian dollar sell off. You can see that the Australian dollar touched well below 60 cents to the US dollar and continues to fall against our major trading partners.

So what’s the value of this from an investment point of view? It’s really important to think about that when you’re investing in offshore markets. As the Australian dollar declines, it does provide some buffer to the overall performance of your portfolio because when you translate those offshore earnings back into Australian dollars, in effect, you’re getting a better Australian dollar return. Just to highlight this point, even though March has been a really difficult month for financial markets – the ASX 200 is down roughly around about 32% – but when you’re looking at global equities on an unhedged basis or when you’re investing in global markets returns are still negative, but they’re down 15% or half of what it would have been if investing just in the Australian market.

That’s one of the reasons why we continue to focus around managing diversity across the portfolio. When you think about investing, the mix of having both some level of Australian dollar exposure as well as having a majority of foreign market exposure is particularly important, just in terms of balancing out the overall return. Rather than having it all in one currency as your sole exposure and ultimately the sole return that you get based on that that asset class. Even though we are clearly looking into very challenging times from financial markets perspective, the Australian dollar can provide a little bit of a buffer to investors, particularly when investing in offshore markets. Even though the Australian dollar has fallen, that buffer when translated back in terms of overall investment returns can mitigate some of that downside risk.

As always, if you have any queries please reach out to your advisor.

Piers Bolger is Chief Investment Officer at Viridian Advisory

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