Global equities could protect against falling AUD – Plato

Investing in global equities can help investors benefit from a weaker Australian dollar (AUD), according to Plato Investment Management.

Dan Pennell, senior portfolio manager at Plato, said global equities provided the benefit of protection against imported inflation, which could be caused by a weakening local currency or increase in foreign prices.

“We all know a weaker Aussie dollar can import inflation by making imported goods and overseas holidays more expensive,” Pennell said.

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“Offshore assets can help protect against these risks. If prices of imported goods are rising overseas, the value of any global investments should increase to offset or hedge against these rising prices.”

The AUD had a positive correlation with global equities in the last 20 years, generally weakening when equity markets fell and strengthening when they rose.

When global equity markets fall, a weaker AUD would boost the portfolio return.

“For an Australian investing in the US during the 2008/9 financial crisis, the Australian domestic market fell -33% and the US market lost -41%, a significant drawdown in their local currencies,” Pennell said.

“However, as the US market fell, the AUD fell with it. The weaker AUD [which was] -33% v USD meant that one US dollar of return bought 33% more Aussie dollars.

“Consequently, the US market in AUD terms only fell -13%, offering significant benefit to an Australian investor.”

Market moves during the Global Financial Crisis in USD and AUD

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