ASX attractive while Kiwi dollar is high
Oh, the swings and roundabouts of investing in Australia!
It wouldn't be wise to bother grandpa - or ma - next time you see them with a calculator studying share tables. Chances are they'll be feeling like popping a cork after working out how much better off they are following rises in many Kiwi share prices, thanks to improving profitability and dividend increases in this profit reporting round.
But odds are that the smiles will fade after they've checked how much their Aussie shares are worth. Recent gains in their market - and there have been many - may have been chipped away by the relentless rise in the Kiwi dollar. Over the past year it has risen from A79 to A93 cents.
However, the strong Kiwi dollar also provides an opportunity, especially for people who in a few short years may be retired grandparents themselves checking out their investment nest eggs.
The current exchange rate gap is making Aussie shares better value than for years, providing a chance for do-it-yourself investors with spare cash to build, or add to a portfolio. Some will invest further afield - in the US, UK, Asia or Europe, helped by communications advances that make it easier than ever before to track overseas business news and price movements.
That said, over the years many Kiwis have tended to concentrate on Australia, not counting the millions of dollars invested through KiwiSaver and managed funds. Many Kiwis have worked across the Tasman, while regular visits have made it easier to understand. Many companies operate in both countries and importantly for investors both are in similar time zones. The ASX offers more opportunities than the NZX: chances to diversify investments and buy shares in world scale companies in mining, banking and in familiar names in industry.
Many longer term investors are unlikely to be jumping with joy at talk that the New Zealand dollar might soon be on par with Australia's, though First NZ Capital predicted this week that the Kiwi dollar would instead fall, but not much - to A90 cents by year's end. They predict the NZ dollar would fall to 80 cents against the US by the end of the year.
On a happier note next year Kiwi investors may see progress on one of the most vexed trans-Tasman investment issues. While the news media focused on genuine issues relating to Australia's treatment of Kiwi workers there in the talks between John Key and Tony Abbott, a few lines in the joint statement issued after their meeting implied a resolution may be closer than assumed to one of the biggest investment bugbears between the countries - tax imputation.
Kiwi investors have long been annoyed when they get dividend cheques from Australian-based companies that also operate here, and find Australian shareholders get an extra imputation (called franking there) tax credit payment denied us. These credits are designed to avoid taxation being charged twice: once on the company and also on its shareholders. The Australian Treasury opposes extending the scheme here, arguing that it would lose too much revenue.
Amid all the talk about Australia facing massive budget blow-outs, it was surprising to see the statement hinted that progress had been made on the subject. It said that to deepen economic integration, the governments had agreed "on a way to take forward the joint Productivity Commission's report on strengthening trans-Tasman relations," and that the subject of mutual recognition of imputation credits is to be referred to Australia's tax reform white paper.
Investors in Australian stocks have had a rough few years, though returns were cushioned for Kiwi shareholders by a strong Aussie dollar for much of the time. Unlike here, many companies got into deep trouble after the global crisis in 2007 and were forced to raise extra capital at heavily discounted prices to survive. Any ANZ Bank shareholder, for example, who didn't buy extra shares at A$14.40 back in October 2008 will be kicking themselves - the shares were A$32 last week.
Mining stocks like BHP and Rio, after showing stellar performances immediately after 2007, subsequently plunged in value at signs of slackening Chinese demand. Lately they have picked up due to stopping grandiose expansion plans and severely cutting costs.
The wheel seems to have turned as their economy shows signs of recovery. Last week Deutsche Bank said Australian companies and investors were enjoying the best reporting season in years. Most results were better than expected, leading to the ASX 200 index rising strongly and outperforming global equities by two per cent over the past month.
The report said earnings growth was the best since 2011 "helping justify the market's rise over the past 18 months".
Across the board, net profits appeared to be up 12 per cent, driven by higher commodity prices, a lower Aussie dollar, and good underlying profits from the banks. While earnings from industrial companies were flat - apart from airlines and QBE Insurance - they showed impressive 12 per cent growth during the period, while profit margins appeared to be rising.
Deutsche said pay-out levels had risen to above average levels, but balance sheets were healthy and lightly geared. It said that with an improving economic backdrop companies may be considering expansion through takeovers instead of returning cash to shareholders.
The Dominion Post