RECENT EVENTS HIGHLIGHT OUR VULNERABILITY
Mark Lister, 23 November 2016
Many investors will cite every excuse under the sun to avoid venturing outside our shores and investing their money in other parts of the world.
Currency movements can go against you, dividend yields and interest rates are lower overseas and it feels like you’re going out on a limb. The tax regime for global shares is also confusing, bureaucratic and off-putting.
Besides, NZ investments have been excellent for most of us. Property has been great and the returns from local shares outstanding. Investors have been rewarded for ignoring the other 99.8 per cent of the world and ploughing every last dollar back into NZ Inc.
However, two recent events are a stark reminder of just how exposed we are. The US election will have consequences for us, even if we can’t pinpoint the quantum just yet. We are a small country that is highly dependent on trade, as well as the economic prosperity of those we do business with.
The recent earthquakes were another example of just how susceptible we can be. It looks as if the economic impact will be modest, on a national level, at least.
Nevertheless, it could have been much worse, and it won’t be the last national disaster we face.
These two events highlight some of the risks in our great, but small, vulnerable country.
We are at the mercy of policy decisions in other countries that could influence our economic growth and prosperity. Our topography and its tendency to suffer earthquakes poses risks as well. These aren’t the only things that could go wrong. In small economies like ours, everything is interdependent, so if one important sector or region runs into trouble, you see pressure come on the rest. This disruption means pressure on company profits, borrowers, consumers, as well as house and share prices.
Times like these tend to go hand-in-hand with our currency falling, too. In 2008, the NZ dollar collapsed from more than US81 cents to below US50c in the space of a year. That’s hard to see at the moment, but if something out of left field pushed us into recession, it could happen. To some degree, such risks are unavoidable, and they are the price we pay for living here. However, there are simple steps investors can take to mitigate them.
Having some of your money invested outside New Zealand is crucial for long-term investors. For most of us, our house and our job are highly dependent on the local economy continuing to perform well.
Why make things even more concentrated by adding all of your investments to this already-small basket?
It’s a good idea for investors and KiwiSavers to make sure they’ve got a decent exposure to global assets. Think of it as an insurance policy if something goes pear-shaped at home.
Maybe that’ll never happen. Our economy could continue outshining the rest, house prices and shares might keep going up, and things might be rosy forever. Maybe not though.
This article was published in The New Zealand Herald on 23rd November 2016.