With the events in and around Parliament House last week, the numbers most often quoted were from the ever-present bookies, happy for the free press and keen to weigh in on who would be the nation’s next political leader. Those numbers were volatile, as Scott Morrison went from distant outsider to favourite as the Machiavellian machinations worked their destructive way through the Liberal party room.
The cause of the insurrection was - at least nominally - a different set of numbers; with Malcolm Turnbull weighed down by the “30 Newspolls” test he’d used to justify overthrowing Tony Abbott just a few short years earlier. (I don’t think anyone believes that was cause enough for Malcolm’s removal, but it was a nice way to frame the action being taken as a hopeful cure for political unpopularity.)
While the punters, pollsters and pollies were happily - or unhappily - watching those numbers, there was another number that received scant attention, and yet is far more important for many businesses and workers across the nation: our country’s fluctuating exchange rate.
The moves sometimes seem small; after all, when the Aussie goes from US72.8¢ to US73.3¢ and back again, we’re talking fractions of a cent. But ask importers, exporters or those borrowing (or lending) money overseas, and they’ll set you straight. Foreign exchange ranges are small, but have an extraordinary impact on both prices and profits in the Australian economy. Indeed, at BHP alone, a 1¢ move in the exchange rate has a $116 million annual impact on profit, according to the company, Now multiply that by all of the public and private companies in Australia, then add government and company debt. Lastly, there’s the balance sheets of Australia’s major banks, which get a chunk of their debt funding from overseas markets.
And all investors - even if you invest only in domestic companies - have to come to terms with it. JB HiFi might have stores only in Australia and New Zealand, but almost all of its products are largely or completely imported. Ditto Woolworths’ Big W and Wesfarmers’ Target and Kmart. Most Blackmores products might be bottled here, but the ingredients are largely imported. For better (and not even slightly for worse, on a net basis), we’re in a global economy and the dollar’s move impacts all of us.
And rather than fearing it, investors would be well served embracing the fact that The Little Aussie Battler, as the dollar is sometimes known, will move around. It’s a good reminder, after all, that Australia represents only 2 per cent of the world’s capital markets - and less as a share of GDP. And, as they say, if you can’t beat 'em…
Joining 'em, in this case, means a few things. Firstly, look at Australian companies that have exposure to other currencies and geographies. Not necessarily to make bets on which way the dollar will go, but to give your portfolio some natural resilience as currencies bounce around. Next comes investing overseas: either buy an ASX-listed overseas-focused exchange-traded fund or unlisted managed fund. To complete the trifecta, keep a long-term perspective. Currencies, like stock markets, will ebb and flow. Don’t expect the tide go move forever in your favour.
Simpler times meant not needing to worry about foreign exchange fluctuations unless you were a farmer or grain trader. But you needn’t worry about currency; just being aware of it, and knowing how to analyse your portfolio (or simply ride the long-term wave) will see you forewarned, and so forearmed.
Scott Phillips is the Motley Fool’s general manager.