There is a thief lurking in your portfolio. And you don’t even know he’s there.
Yet he could cost you as much as half the value of your portfolio over the next ten years. Not just your returns, but the very value of your investments.
I know you think I’m on about inflation (again)…but this loss comes on top of the inflation tax.
I’m not talking about a wealth tax either…although the impact could be quite similar.
Nor is the threat fees…as much as they are a threat to your returns.
And I’m not on about counterparty risk…although the First Guardian and Shield managed investment scheme failures were a good reminder of how real that risk is.
Instead, I want to talk to you about the thief that already robbed you between 2001 and 2008. And again between 2009 and 2011. Almost halving the value of some of your investments, both times.
Like a vampire who’s keen to keep their pray alive, you may not even have noticed the theft at the time. Yet it was very real.
So, whodunnit?
How I doubled my money using my feet
In 2017, I got a job offer from our sister company in England. So I moved to the UK, via a few months living in Japan.
My London salary gave me a big pay rise…which London’s cost of living promptly took away again.
During the COVID pandemic, my growing family moved back to Japan for a year and then Australia.
Getting paid a London salary with a Japanese and Australian work-from-home cost of living worked out rather well. But it was small fry compared to what happened next.
The soaring British pound gave me a truly whopping pay rise in terms of yen and Aussie dollars as the years wore on.
But what the good currency market giveth, it can taketh away.
I suspect the same exchange rate tailwind is about to rob the both of us. In much the same way it boosted my earnings over the past five years.
It will crush my income and devastate the value of your overseas investments.
The Australian dollar is
overdue a comeback
Before we get to the crime, let’s look at the motive…
First of all, the Aussie dollar is overdue a comeback after a 44% drop against the US dollar since the commodity boom peaked in 2011.
But why might the comeback occur? For the same reason the Aussie dollar got dumped: the commodity cycle is a cycle. It goes up and down.
We are at the beginning of a secular commodity bull market. The sort we experienced between 2001 and 2011, with an interruption known as the Global Financial Crisis.
Back then, the Aussie dollar soared from current levels to more than parity with the US dollar.
A commodity bull market is exceptionally good news for Australia’s economy. So good that people will again begin to complain about a ‘two-speed economy’ as prosperity gets out of hand.
It’s also exceptional news for Australia’s mining companies. Picking the right ones will once again determine whether your portfolio outperforms the ASX200.
Who pays for this free lunch?
The trouble with a commodity boom is straight forward. It’ll light a rocket under the value of our currency.
Rising commodity prices will improve our trade balance. Which bids up our currency.
Mining projects are notoriously expensive to finance. The inflow of overseas capital will spike the Aussie dollar even more.
What’s the impact on our stock market?
While certain mining companies will soar alongside commodity prices, a rising Aussie dollar is a mixed bag for our other ASX listed stocks.
It’s good news for importers. They’ll be able to buy stuff overseas for cheaper.
It’s bad news for exporters, which will earn less in local currency terms.
But most companies both export and import goods. So it’s not immediately obvious which way they’ll turn.
However, the real issue for investors is your overseas assets.
How the Aussie dollar’s comeback
could crush your wealth
If the Aussie dollar recovers to 2011 heights, that’d make your foreign assets worth about 50% less in Aussie dollar terms!
Of course, the price of those assets will change during that time too. But the point is that your foreign investments would have to soar to offset the exchange rate losses.
This radically changes the investment environment.
If I’m right, there’s no point owning foreign bonds, for example. Even Aussie corporate bonds denominated in US dollars could be disastrous. I doubt the yield will compensate you for the coming exchange rate moves.
But who reads financial newsletters to hear about bonds?
Let’s think through some other implications of a rising Aussie dollar…
It’s time to pivot home
The first lesson of economics is not ‘there are no free lunches.’ It is that free lunches get eaten up very quickly.
For fifteen years, Aussie investors have experienced a free lunch. A currency tailwind that even made my wine investments profitable. The exchange rate gains turned a small loss into a tiny gain.
The Aussie dollar’s fall supercharged gold too. While the price went nowhere in US dollar terms between 2012 and 2024, it already began soaring in 2018 in Aussie dollar terms.
That free lunch is over. And it’ll be replaced by a headwind you’ll struggle to offset.
Unless you do something about it.
The first move to make is repatriate some of your capital back to Australia. Invest more at home.
It’s easy to profit from a falling Aussie dollar. You just invest overseas.
A rising Aussie dollar is a lot more difficult to play because you don’t directly profit by owning any particular asset class. Except perhaps international flight tickets.
Repatriation of capital from overseas stocks is a defensive move. You avoid a currency loss.
What about being proactive?
I believe taking on more risk in your portfolio is an important step to take. If you are going to invest overseas, you need to outpace the Aussie dollar’s coming rise. That’s more likely to occur in higher risk stocks.
The same goes for gold investors. Holding the precious metal is a bet that the US dollar gold price will rise more than the Aussie dollar. I suspect it’ll be a close-run thing.
But if you take on more risk by buying the right gold mining stocks, your returns from a rising gold price should exceed the Aussie dollar’s rise.
The real question is which gold stocks. For that, I’ll defer to our gold-stock picking expert Brian Chu. Check out his analysis on Thursday.
Regards,
Nick Hubble,
Strategic Intelligence Australia
Comments