Why You Should Sell And Buy Overseas

By The Noble Contrarian on January 21, 2011 in Other

In the past 12 months I’ve been to Johannesburg, London, Vienna, Istanbul and Hong Kong. Based on what I’ve seen, Sydney is now one of the most expensive cities in the world.

Food, accommodation, property prices, transport – you name it, it costs more here than almost anywhere else. Even the London Tube, which in 2002 cost me an hour’s Australian salary for one round trip, now costs roughly the same as Sydney’s vastly inferior CityRail network.

Most of us get paid Australian dollars and spend Australian dollars, so we don’t notice how expensive it is here until we travel overseas, meet a tourist or converse with an expat. A few weeks ago I met a new recruit at the University of New South Wales who had transferred from the US in June. He sold his house in Houston – four bedrooms, two bathrooms, double lock-up garage and hardwood floorboards – for $US175,000.

He was somewhat shocked that his pile of Greenbacks wouldn’t buy him a shoe box in Sydney.

So is the Aussie Dollar overvalued?

Probably. Currencies are impossible to value with any degree of certainty but some form of purchasing power parity should hold. In two relatively open economies with floating exchange rates, the comparative cost of tradeable items should be somewhat similar.

Whether the Aussie is overvalued or not, however, there are a number of good reasons for getting a decent chunk of our assets out of Australian dollars. More specifically, there are even better reasons for shifting an investment portfolio from being fully hitched to the Australian economy to a more balanced exposure between Australia and the US.

The problem is that it’s difficult to find a corner of the Australian market that is not dependent on the Chinese economy. More specifically, it’s almost impossible to construct a portfolio of Australian stocks not dependent on Chinese demand for Australian resources.

The two do not necessarily go hand in hand. China’s past decade of growth has been generated by an extraordinarily high percentage of GDP devoted to investment.

Throughout the Japanese economy’s transition to first world status, investment as a percentage of GDP topped out at 37% in 1973 and in South Korea it hit 39% in 1991. In China, the ratio is currently north of 40% and rising.

There is a case for a debt-induced crisis in China but it is also quite conceivable that the Chinese economy continues to grow, just like Japan and Korea did, while its demand for resources wanes thanks to a structural shift away from investment and towards consumption. Either scenario would be bad for Australia.

The problem is not so much stocks with direct exposure to Chinese demand – that is a manageable risk in the context of a portfolio. The problem is that the whole Australian economy is hitched to the China bandwagon.

Unemployment, the government’s financial position, asset prices and consumer spending are all only one or two steps removed from the China boom.

I’m not making a call on whether the resources boom is going to turn bust. The risk is there and, as Australian investors, whether you think a bust is likely or not, we have too much exposure to China.

With the dollar carrying so much purchasing power, the time is perfect to do something about it.

You can read the rest of this article, including a few of my preferred foreign investments, at www.iifunds.com.au/bristlemouth/its-time-buy-us.