Investing can be a volatile ride, the last few days have reminded us.
The last few days have also reminded us why holding international equities is often beneficial for Australian investors – the Australian dollar acts as a shock absorber on returns when volatility hits, which is exactly the opposite effect that international investors get investing in Australian stocks.
Let me back up a few steps first to paint the larger picture.
The Australian market is viewed by international investors as a “high beta” exposure – when its good its very good, when its bad its very bad.
For an international investor deciding between buying Australian assets or international assets, the returns look like this:
Most of this is the currency – as we saw over the last few days when markets fell by 1-2%, the Australian dollar fell a little less, almost doubling the downside for an international investor in Australia.
From a weekly volatility perspective, the volatility in a global portfolio over the last five years (in USD) was 11% vs 18% for an investment in Australia – a stark difference.
But this all changes for Australian investors. Perspective matters.
Now the currency acts as a shock absorber:
Source: Factset, Nucleus Wealth
A lot of this is the currency – as we saw over the last few days when markets fell by 1-2%, the Australian dollar fell a little less, almost cancelling much of the losses on international markets for Australian investors in international assets.
From a weekly volatility perspective, the volatility in a global portfolio over the last five years (in Australian Dollars) was 11.8% vs 13.0% for an investment in Australia – a much lower difference. And another win for investing in an international portfolio – international investments have had a lower volatility despite (actually because of) the currency effect.
Now, I hasten to add that this is historical and relationships do change. But this is not a relationship that I expect to change over the next few years – in fact, it is a major reason why we are heavily overweight international stocks in our portfolios.
I can’t tell you what Trump will do next or whether we all should be going long fall-out shelters and potassium iodide.
If we are headed for war, then bonds, not stocks are the place to be. A nuclear war is not our base case, but we are expecting the ride to be a lot smoother (for an Australian investor) in international stocks than in Australian stocks regardless.
Damien Klassen is Head of Investments at Nucleus Wealth.