For international investors in Australia, the Australian dollar has also been an important factor in the analysis of equity returns. The Reserve Bank of Australia (RBA) recently stated that the currency is anywhere from 4% to 15% overvalued, a scenario not helpful to the country’s export sector. To combat that pressure on the economy, the RBA has lowered its policy rate from 4.75% to 3.00% over the course of 14 months (October 2011 to December 2012). Typically, when a central bank lowers rates, the impact on the currency is an overall weakening—worrisome to equity investors, because it can detract from their returns—but the fact is, from October 4, 20114, to March 20, 2013, the Australian dollar appreciated 8.41% on a cumulative basis. The resilient nature of the currency has forced Australian firms, especially exporters, to improve their productivity and become more efficient.
One reason for this resilience in the currency could be that many view Australia’s AAA-rated5 debt as a haven for flows during times of uncertainty caused by the trouble in currencies such as the euro and the yen. We believe the Australian currency is more than likely to benefit from these safe-haven flows—especially given the International Monetary Fund’s recent classification of the Australian dollar as a reserve currency—until there is evidence of a global growth slowdown or actions taken by the RBA aimed at directly weakening the currency.
Conclusion
While there is truly no way of knowing whether Australian equities can continue their performance run from 2012 and through January 2013, we believe that it makes sense to consider indexes geared toward a more diversified set of sector exposures to the country.
Christopher Gannatti is a research analyst at WisdomTree Investments (NasdaqGM: WETF). This post was republished with permission from the WisdomTree blog.
Data source is Bloomberg unless otherwise noted.
1Standard & Poor’s, March 2013.
2Source: MSCI, as of 2/28/2013.
3Sources: WisdomTree, Standard & Poor’s, as of 2/28/2013.
4Reserve Bank of Australia’s announcement of initial cut from a 4.75% policy rate.
5Source: Standard & Poor’s, as of March 2013.