If the world economy collapses anytime soon, at least one thing is certain: governments will have a hard time pinning the blame on ‘unfettered’ capitalism or free markets. There’s barely a week without a bureaucrat or politician meddling somewhere and distorting the true picture.
Lately, it’s Shinzo Abe and his grand plan for Japan. And now Wayne Swan and his budget deficit. All this is going to impact on the Australian dollar.
In today’s Money Weekend we’ll expand on an idea we briefly covered in the Daily Reckoning during the week. If you didn’t catch it, here’s the gist of what we wrote on Tuesday…
‘The Next Shot in the Currency War‘Shinzo Abe is back in control of Japan.
‘The ‘new’ prime minister has made no secret of the fact that he wants the Bank of Japan to up the stakes in the currency war. The Bank of Japan has a 1% inflation target. Abe wants them to double it to 2%.
‘Currency wars are about devaluation to encourage exports. The idea in Japan is to weaken the yen and kick-start the moribund economy. Although that’s been the plan for about 20 years now, to no avail.
‘Not to worry, the currency markets took notice! On news of Abe’s election, the yen dropped to the weakest level against the US dollar since 2001, according to Bloomberg.
‘Following his victory, Abe grabbed the nearest mike on Monday and told the Bank of Japan that the people had spoken and they should look to fire up inflation when they meet on Wednesday to discuss policy.
‘No doubt Abe was quick to move because time is something Japanese Prime Ministers have been notoriously short of. This is Abe’s second crack at the helm, and he’s Japan’s fifth Prime Minister since 2007.
”Mr Abe plans to empower an economic council to “spearhead” a shift in fiscal and monetary strategy, eviscerating the central bank’s independence,’ wrote Ambrose Evans-Pritchard in the Telegraph.’
Happy New Year from Japan
Looks like January will be the month the big guns roll out in Tokyo. The Bank of Japan will ‘officially adopt an inflation target, as demanded by presumptive Prime Minister Shinzo Abe, next month,’ and the new Liberal Democratic Party will have its economic stimulus package in the pipeline before the start of February.
Japan is the third biggest economy in the world. That’s a lot of spending power. Very soon a lot of yen is going to be sloshing around looking for a home, especially yield. You’d think some of that is going to find its way to Australia.
That’s why Slipstream Trader Murray Dawes speculated on Tuesday that the yen carry trade could make a big surge next year and could boost Australian stocks.
Reuters spelled out the effects for countries in the yen/USD crossfire, like developing economies. We’d add Australia too. ‘As newly minted cash pours into their economies in search of higher yields, either their exchange rates will rise, making exports less competitive, or they will have to cut interest rates and/or intervene to hold down their currencies.’
Enter Wayne Swan. The decision to let go of the surplus means that the government will have to issue more bonds to get the financing. Our take is that means even more foreign money coming into Australia to buy government bonds and holding up the Aussie dollar.
So it’s hard to see the Aussie dollar offering any relief anytime soon to the industries that suffer with a high exchange rate. You can see below the Aussie dollar hit a high against the yen this week.
One Way to Play the High Aussie Dollar
You could argue, like our own Kris Sayce, that the Aussie dollar is due for a correction. Maybe. We don’t know. But there’s no doubt the high Aussie dollar is something you can take advantage of as an investor.
Australia is a small, open economy. That’s why large capital flows coming from countries like Japan have such a big impact here. Remember, the Australian economy is only 2% of worldwide GDP.
So now looks like a great chance to use the strength in the Aussie dollar to buy assets overseas. You can easily do this by adding exposure to foreign markets to your portfolio.
The Aussie stock market is dominated by resources and banks. The ASX index moves when these two sectors move. So if you want a truly diversified portfolio, that’s not great.
That’s why it makes sense to diversify the industries and markets you’re exposed to via shares in other countries. But what’s the best approach? Which overseas markets do you look at?
That’s a tricky question. But one way is to look at large multinational corporations with exposure to many countries rather than just one.
This has been a theme used by our colleague Dan Denning this year in his Denning Report. His position is big global blue chips are the best way to give your portfolio international diversification.
Global blue chips have proven and durable business models. They’re not usually correlated to one economy because they operate in so many different markets worldwide. Companies like these can also tap into the growth offered by emerging economies.
Australia has very few non-mining globally competitive companies. News Corporation and CSL are two that spring to mind. But it’s a short list.
Long term, if you’re worried about having too much exposure to one economy, it makes sense to look at the bigger picture. Right now with the Aussie dollar near a multi-year high, there are worse things you can do than picking up a few of the world’s diversified big name stocks.
Callum Newman
Editor, Money Weekend
The Most Important Story this Week
You could say there’s two ways to approach the volatility in the share market today. One is to get out of stocks all together and not deal with it. That’s not very helpful when it comes to building your wealth. The second is to turn the volatility to your advantage. Kris Sayce explains how in Australian Stocks: Still the Best Wealth Builder in Town
Highlights in Money Morning This Week…
Murray Dawes on Why You Should Watch the Japanese Yen: ‘So after two decades of printing money and spending it without successfully reviving the Japanese economy, they’ve decided to give it another go. Japan really is the poster child for failed Keynesian stimulus policies.’
Shah Gilani on Why We Should Abolish the Fed: ‘The Federal Reserve System is a government-sanctioned private enterprise that functions as a socialist tool…These days the Fed doesn’t just backstop America’s too-big-to-fail banks. It has expanded its doctrine of socializing banking losses globally.’
John Stepek on Is China’s Rebound for Real? Don’t Bet on It: ‘Suddenly all those people who briefly turned bearish earlier in the year are now declaring that there will be no ‘hard landing’ for China. We’re not convinced. The business model that got China to where it is today is irretrievably broken.’
Dr. Alex Cowie on Why Uranium Stocks Could be Worth Another Look: ‘This week’s Japanese election win for the nuclear-friendly LDP has been the trigger to set off this rally…But there is more to the rally than meets the eye. There is something else in the wind.’
