Income investingInsightsGlobal shares

How global income investors can benefit from currency exposure

By Dr Don Hamson - Managing Director, Plato Investment Management

One of the benefits of having an allocation to global equities (unhedged) in your equity income portfolio can be currency exposure. As an example, most self managed super funds, and a lot of superannuation funds, are heavily invested in Australia. That means you are, by default, invested in the Australian dollar and it’s quite a volatile currency. It tends to go up and go down, and when it goes down you are losing value and relative purchasing power if you want to buy things from overseas.

By way of example, in Australia we don’t make cars, we don’t make electronics. If you buy an iPhone or a Samsung, if you buy a car, you’ve got to buy it from overseas. If the Australian dollar weakens it’s actually going to cost you more.

So, interestingly, having some money in your superannuation fund in overseas currencies actually helps hedge against the Australian dollar falling. Because if the Australian dollar falls, the value of overseas assets actually rises.

The double benefit of holding overseas currencies

There’s also a double benefit here in have an allocation to unhedged global equities for income. If you go back historically and you’ve looked at when markets have fallen and we’ve had pandemics, or when we had the GFC, or even Wall Street crashes – the Australian dollar has a strong tendency to weaken in times of crisis. And so when the value of your Australian shares is falling and the markets falling, the Australian dollar is also falling. So you’re getting almost a double whammy, your wealth is going down even faster and particularly the ability to buy things from overseas.

Now interestingly, if the Australian dollar is falling the value of your overseas assets is actually rising. So having global equities helps protect that capital, so when the market crashes the currency has actually been a great diversifier.

Investors should, however, consider risk and always seek professional advice before making financial decisions.

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