International Delivery?

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We have been very positive, in fact, pushing for our clients to have overweight positions in the International Equities sector for the past 3 years. We have operated on 2 key reasons for this:

  1. A decline in the $A
  2. Exposure to businesses that offer more growth when compared to our market

Over the last year international equities outperformed our own market by 5 times! That is your international exposure should have returned approximately 25% versus 5% on your local portfolio. This is the biggest differential I can ever recall and the scary thing is, it could continue.

When we consider our 2 key reasons for outperformance their drivers still appear strong.

The $A is surely going to continue to fall. Firstly driven by declining commodity prices (and possibly demand) there is going to be less demand for $A. Secondly, I believe that our interest rates are set to remain low for longer.  The talk for rate rises before the end of the year that followed the last rate cut have disappeared. The effect of the cuts in boosting economic activity are negligible and rates only rise when activity is on the rise.

Further supporting our theory is the fact that US Fed Chief Janet Yellen is expecting a rate rise in the US by years end (surely she’d know better than anyone if this was true). A rate rise in the US will further weaken demand for the $A (where our rates were higher we had a lot of cash being invested from overseas – called the ‘carry trade’) and continue to push it lower.

And personally, I think this is all good news. We need a lower $A to drive economic growth through exports and tourism.

Next, consider our big market companies – BHP, RIO & the Banks.

BHP & RIO are struggling to grow under the weight of falling commodity prices. Growth in output is offsetting declining prices but that is only maintaining the status quo. For the banks, the issue is increasing capital requirements hitting their interest margins. Any potential fall in the interest margin results in a potential fall in profit.

All-in-all growth of some of our big market drivers is looking restricted and this means overall performance in our local market is looking restricted. Compare that with global multi-nationals like Google or Apple. These tech giants have significant cash reserves and growth seems only restricted by their ability to continue to develop products we use.

For these reasons it is important to maintain balance in your asset allocation. The tide of performance ebbs and flows. At the moment it is flowing overseas.