Timing is right to look at buying offshore investments

August 2017

Pressure on Australian dollar opens path to US and European bargains

By Simson Sanaphay

The Australian dollar is at its highest level in two years but that strength is teetering, meaning now is a good time to consider asset purchases from a global perspective.

The best time to buy offshore assets is when the local currency is strong, and the currency you are buying into is weak, as you get more for your outlay.

If you buy income producing assets, like dividend-paying US equities or bonds, and the local dollar falls, the translation from US to Aussie dollars puts more money in your pocket, and the same result is achieved if you sell offshore assets.

Also, if you are inexperienced in offshore asset purchases, the easiest play is US dollar denominated assets in the world’s largest equity and bond markets.

And equity markets represent not only a simple entry point, but the US market also offers deeper sector plays than are available in Australia’s relatively narrow band of blue chip offerings.

On a like-for-like basis, US equities are offering similar returns to domestic equities, but the US economy is outperforming the domestic economy, and even Europe is offering better looking options, given the low base it is coming off as recovery sets in.

The inability of the US Trump administration to push through proposed legislation, like tax cuts, has fostered weakness in the US dollar, and in Citi’s view that reinforces the current opportunity to use strength in the Aussie dollar to diversify offshore.

If, as we expect, the US administration does get its tax cuts through at a later date, it could come as a surprise to markets, and strengthen the US dollar.

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Conversely, Citi expects commodities prices to enter into a phase of weakness, with iron ore and coal prices to come under pressure, which will place downward momentum on the Aussie dollar.

Market consensus is for the Aussie dollar to settle back to US75c range. Citi shares that view, forecasting the currency to mark time for the next three months, before falling to the mid US70c level within a year.

On the US side of the equation, the greenback has been downgraded as “the Trump effect” impacts fail to materialise, like tax cuts, free market reforms and big spending on defence and infrastructure.

Economic data also continues to surprise both on the upside and downside, and the third US rate rise is now not expected till year end, at the earliest.

This uncertainty has weighed on the US dollar, but Citi’s view is for tax cuts to eventually arrive, and potentially surprising the market and driving sentiment up.

Aside from the currency strategy, diversifying into offshore equities and assets is good for portfolio diversification.

In the ASX 200 the big four banks and major resources stocks account for 64% of the index. Compare that to the MSCI all-country index, the global proxy of the world’s economy, which has a more balanced 19% exposure to financials and 5% to resources.

The relative local imbalance means Australian investors miss out on a host of global big-name stocks in key sectors like technology and pharmaceuticals.

While our preferred offshore play is into US denominated assets, there are other opportunities, particularly if you already have sufficient US exposure.

Although the Euro has strengthened 11% against the US dollar this year, and may have further to go, we do not expect that to start hurting corporate earnings.

Our analysis is that over the past 15 years economic growth is a more important driver of earnings for European companies than currency shift.

Of course, it does have an impact, with sectors that derive a large portion of income offshore, like Healthcare and Technology, underperforming when the Euro strengthens.

Domestic sectors, including utilities and banks, tend to be more resilient to Euro strength.

If you're considering new investment opportunities, Citi can offer both AUD and USD denominated investments across our fixed income and structured investments which suit a range of risk profiles and investment goals. Or if you're looking to diversify your currency holdings, we provide access to 10 currencies and a range of FX solutions.

Simson is Citi's wealth strategist.

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