KEY POINTS:
If you're an exporter then you might well be crying into your latte over the stratospherically high dollar. Investors, however, have something to cheer about.
The high dollar makes virtually anything you buy overseas cheaper, and that includes investments - ranging from shares to gold and even properties.
The logic is that if you bought $1000 worth of any US-dollar-based investment on October 26 last year when one New Zealand dollar bought US65c, your investment, ignoring any commissions or charges, would have cost you $1538.46. That same investment on April 20 this year, when the rate hit a 22-year high of US75c, would have cost you $1333.33. That's more than $200 difference.
But not just any investment will do, says Mark Lister, head of research at stockbroker ABN Amro Craigs. "You can quite safely say that sending money offshore and using the high dollar to buy good blue chip stocks elsewhere in the world over the next two to three to five years isn't a bad strategy. You will get an immediate kicker from the currency and hopefully the offshore investments will pay for themselves over time."
Like many in the industry Lister believes the dollar is fundamentally overvalued, although he and most others have been surprised at the length of time the dollar has remained at or near its current level. "The imbalance we have has got to unwind at some point. We see the dollar coming back to the long term average of US58c or slightly higher."
If the dollar was to fall back to US58c, then your $1000 investment would be worth $1724.14, without taking into account any movement in the price of the underlying asset.
Gold is one such offshore investment priced in US dollars that is being tipped for future growth. This week the price hovered around US$690 per ounce. But international analysts are predicting a rise to more than US$1000, says New Zealand Mint director Mark Sutton. "Because the currency unit for gold trading is the US dollar, the rising exchange rate tends to flatten out the increase in the price of gold in New Zealand dollar terms. Then, when the US dollar drops, the price of gold in New Zealand dollars rises.
"And it was only four and a bit years ago that the New Zealand dollar bought just 41 cents American - at that rate, an ounce of gold would cost you $1683 versus $934 today," says Sutton. "That's an 80 per cent gain if the kiwi drops to those levels again."
It's possible to buy gold or other precious metals directly from the NZ Mint or dealers such as AGR Matthey in Ponsonby where you can simply walk in, hand over your money and walk away with a gold or silver ingot. The company's prices change daily and are based on closing prices in New York.
Other options include buying gold directly from the Perth Mint, where you pay a fee for your gold bullion to be held. Gold doesn't produce an income and some investors prefer to buy shares in mining-related companies. The catch there, says Robert Oddy, director of International Financial Planners, is that even Australian mining-related stocks are subject to the new FDR (fair dividend rate) tax, which can be very cumbersome.
It's also possible to buy other Australian-based commodities stocks. Many of these stocks are seen as being already highly priced in the current market and although a good long-term prospect, might be too volatile in the meantime for conservative investors to stomach, says Oddy.
It is not actually necessary to buy investments to make money from the high dollar. You could just walk to your nearest bank branch and buy a wodge of US dollars, hold on to them until the New Zealand dollar drops and then buy New Zealand dollars back, making a profit along the way. A better option if you have cash now, but are not ready to invest it overseas yet, says Oddy, is to deposit it in a foreign currency account with a bank or other institution. Stockbrokers such as NZ First Capital have currency call accounts and are able to get better exchange rates than the average person in the street.
At a more sophisticated and risky level, it's possible to trade foreign exchange (forex) on margin (borrowed money) in theory amplifying any gains or losses.
It should be said that trying to second-guess currency or other markets can be a dangerous game for amateur investors. Anyone who makes investment decisions based solely on currency movements is a gambler, not an investor, says Oddy. It's better, he believes, to base your investment decisions on your lifestyle, not the hope for a short-term gain.
Having said that, Oddy's own clients' portfolios are being pushed out of New Zealand as much as possible, for both currency movement and economic reasons in part highlighted in an Organisation for Economic Co-Operation and Development (OECD) report released earlier this week that called for reforms of our tax system.
Oddy said when investing clients' money offshore his company favoured the "generalist" overseas listed trusts and a number of direct equities. He added, however, that anyone with long investment horizons might consider investing in companies or sectors involved in international water and food production, both of which are coming under pressure thanks to population growth. "It takes 1900 litres of water to produce one kilogram of rice, and 15,000 litres for a kilo of beef. We will be [using] 55 per cent more food by the year 2030," he says.
Thanks to the high dollar, says ABN's Lister, there are certain local companies that will be benefiting, such as Sky TV, because the cost of imported goods and services are cheaper. Those investors with a long horizon might consider investing in companies that are currently priced down thanks to the high dollar - mostly exporters such as Fisher & Paykel Healthcare. "It is looking pretty cheap because its short-term horizons will be impacted. That gives investors a long-term opportunity."
The FDR tax on offshore investments that came into effect on April 1 makes managing overseas investments a lot harder, and more expensive. For example, currency gains against the kiwi on cash held overseas are taxed. And those who have held cash in Australian listed trusts for cash management purposes are going to find their tax returns very complex indeed.