Their Loss, Our Gain

Sydney Morning Herald

Wednesday June 14, 2000

David Langsam

Local investors can make a buck out of other countries in a low-dollar climate. David Langsam

With the Australian dollar languishing against the US dollar and sterling, foreign investment is becoming expensive, but brokers say that shouldn't deter long-term investment. There are two options available to Australians wanting to invest in a low-dollar climate: one is to invest in currencies that are weaker than ours and have suffered what appears to be a temporary but deep decline, such as the Fiji and Solomon Islands currencies; the other is to invest in local export industries.

Australian Stock Exchange (ASX) spokesman Gervase Greene says the devaluation of the dollar has tipped the so-called level playing field in favour of Australian exporters. But Greene notes that the devaluation is primarily against the US dollar, and that the Australian dollar has been low against sterling for some time. He says that the Australian dollar has held its own against the Euro and the Asian currencies.

"Assuming the Australian dollar stays low, one strategy could be to buy [into] companies that are exporters," Greene says. He says investing in agribusinesses and companies with contracts to export to countries with strong currencies are ways of "making a virtue of a depressed dollar".

Greene says that foreign interest in Australian equities has not increased dramatically since the April 17 high-tech correction, with foreign investment remaining at about 25 per cent of value of the ASX's 45,000 to 50,000 daily transactions, down from 75,000 to 80,000 daily transactions in early April.

Commonwealth Securities director Paul Rickard denies that his broking firm's launch of Australian dollar-based US share transactions was badly timed. He says that online investors buying US shares with Australian dollars in February, at about US65c, have profited by having their investments offshore, assuming that they have bought safe, blue-chip US stocks.

He says that in the long term, "investing overseas has been a wise strategy. For a long-term investor, the Australian dollar has been gradually sliding against US and other currencies". He expects the Australian dollar to bounce back in the short term and says that there are predictions that the US dollar may experience downward pressure because of the US trade deficit.

Australians wanting to take advantage of a low dollar should invest in commodity-based stocks, such as Woodside, BHP, RTZ and MIM, he says. "The major miners benefit from a depreciation, because all their trading is priced in US dollars. They also run a hedge book."

That means they sell forward, entering into futures contracts with guaranteed sales. They then set an exchange rate with a bank, giving a fixed rate for Australian dollar income.

"It's important to know there is some certainty of company earnings," Rickard says.

Rickard recommends any company with significant overseas earnings, such as News Corp, which earns mostly US dollars, although its share price is quoted in Australian dollars.

But Merrill Lynch's Sydney-based private clients director, Nick Tucker, says investors "should not get hung up on currency movements for long-term investment. Every Australian should be investing internationally because of the historic low returns of the Australian market."

He says the average British investor has 30 to 40 per cent of his investments outside Britain, and the average American investor has 15 to 20 per cent invested internationally, but Australians have very little offshore exposure.

Those wanting to invest internationally should buy diverse stocks or absolute blue chips, or join managed funds, he says. "Predicting movements in the Australian dollar is difficult, but predicting where growth is is relatively easy. It's mainly in health care and technology."

He says the exchange rate is of lesser importance. "It is of far greater importance to look at the underlying investment."

Macquarie Equities economist Riccardo Briganti says that offshore investment carries a double risk, relating the stock and the currency. He says the weakening of the Australian dollar has not occurred in isolation: it has happened because there are perceptions of weakness in world growth, and because there has been no further movement of Australian interest rates.

Briganti says it is important to ensure a balanced portfolio that is not dependent on the resources sector alone. He says that resources get the benefit of their costs being in Australian dollars and their income being in US dollars, which gives "a much-improved profit result".

But there are pitfalls. "The weak currency reflects expectations of commodity price weakness. You may get a benefit if the Australian dollar has dropped 10 per cent, but if commodity prices drop 15 per cent then your revenue benefit is eroded."

He says that apart from resources, the companies with foreign-denominated profits, such as News Corp, Brambles and Lend Lease, benefit from a low dollar. Companies such as Woodside benefit from foreign-denominated sales and the increasing price of oil.

DEFINITION

Undervalued currency: a currency being traded below true market value owing to the relevant country's economy, political risk, interest rates and other circumstances.