Buying US Shares? Read this first

Last year was poor for local shares despite company profits hitting a record high $270 billion, thanks to the fastest annual growth in profits in three years. So whilst 2014 may not have been any good for local investors, for those investors who took the plunge and snapped up US stocks, they had reason to celebrate.

After a wobbly start the S&P 500 did well. The major index on Wall Street was down 3.5 per cent in January, which made a mockery of the rule that says the performance of stocks in the first month of the year dictates where the market will finish the year. Fortunately instead, the S&P 500 posted its third consecutive year of double-digit gains (it’s up six years in a row if you use total returns).

The declining value of the Australian dollar against the US dollar also helped. It had the effect of giving an additional boost to returns from international shares.

It pretty much an understatement to say that most people believe that when the Aussie dollar is strong, it’s a good time to buy all sorts of stuff from overseas, including cars, clothes and of course foreign holidays.

But should the same logic apply to investments? Logically, if the dollar buys more foreign stocks today than it used to, then perhaps that is the time to investment in overseas markets before the dollar rolls back down.

In 2014 the Aussie dollar fell from US90¢ to around US78¢ now. But it did reach US94¢ in the middle of the year, so a few months it would have seemed like a good enough reason (albeit risky) to buy more foreign stock and diversifying your holdings overseas

However, for any investors thinking of buying global stocks there are a few questions that you should answer before making that decision.

Among them: where do you think the currency is going next? What are the merits of overseas shares versus Australian in the near term? And, if you are buying a managed fund, do you want a fund that exposes you to movements in the currency, or hedges them out?

Whilst all investments carry an inherit risk and there is never any real way of telling which way a particular product will go, currency is traditionally the most difficult to forecast of all financial instruments and so it’s easier for a fund manager to let clients make the hard decisions themselves. Of course, investors don’t have to take currency risks when they buy overseas shares.

The popular view now is that the Aussie will fall, and that at some point the US Federal Reserve will move interest rates back up to a more normal level.

Of course one reason to stay local is the relatively high dividends that are still on offer in the local market. But they are not as good as they were a few years ago. The culture of paying high dividends that is so innately entrenched in Australian stocks is not as ingrained in other parts of the world. So investors who like their regular yield inflow may find themselves disappointed by their returns from overseas.

Another reason is familiarity. Investors in domestic large-cap companies have made an informed decision about them, because they see and read about these companies every day, as well as using the services they offer whether through buying an insurance policy, going to the bank or shopping in a mall.

On the other hand, offshore investment has a lot to recommend: exposure to different growth stories, diversification and sectors that aren’t really represented in Australia, such as pharmaceuticals or automotive manufacturers. But it comes with risks, too. They are unlikely to have that degree of familiarity, and hence a decent judgment on product quality and about foreign companies is an absolute necessity.

Many fund managers offer both hedged and unhedged versions of their global funds. For those investing through managed funds, that doesn’t really matter so much: you’re paying someone else to make that judgement. But certainly for anyone investing directly, it can be a challenge.

For more specific help and guidance with your own investment strategy or asset selection, please don’t hesitate to contact Our Partner - Wealth Consulting, Michael Rees-Evans CFP® in our office on 02 9299 7044 or by email at michael.rees-evans@lockwood.com.au

Important note: this information is based on opinions and information obtained from various sources deemed reliable. However, it is of a general nature and has been prepared without taking account of anyone’s financial situation, objectives or needs. Before making any investment decisions based on the contents you should obtain professional advice.

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