In an earlier article about dollar depreciation it was promised that there would be some articles about where to invest in order to anticipate a weaker US dollar. The first place that one should look is Australia. The country is quite stable and has not had a recession for several decades. The Australian dollar at the present time is undervalued. See the chart.
This five-year chart shows that the Aussie dollar has fallen from 0.90 to just under 0.70 in the last five years. That is an indication that the Aussie dollar has become cheaper to buy for American investors. It is unlikely that it is going to fall much further. Fifteen years ago the Aussie dollar was practically par with the Swiss franc. This gives an idea of how much the Australian currency has depreciated. Of course there has been a lot of inflation in Australia, especially in housing, but it should be clear that now is a good time to shift some US dollars to investments in Australia.
One aspect of the Australian economy is that exports of iron ore and coal help to influence the exchange rate. China is the main customer as Australian coal is of much better quality than the brown coal mined in China. As for iron ore, China`s need for massive amounts of steel guarantee that Australian iron ore miners will have a market where they can unload large amounts of iron ore.
The forecast of lower amounts of exports is compensated by higher prices for iron ore. The Chinese demand for iron ore will remain high. This will help to keep the Australian dollar stable.
Another aspect of the Australian economy is that the RBA (Royal Bank of Australia) is expected to lower interest rates slightly to offset the lower prices in some segments of the real estate market. Prices for real estate reached high levels due to extremely generous mortgage loans, which enabled buyers to acquire real estate that was expensive for their financial situation. The banks have tightened up requirements for lending with the result that the real estate market suffered even though interest rates remained stable. The RBA is trying to offset this development.
The real cash rate is the cash rate minus inflation, which is about 2%.
One can see that the RBA reacted to the global crises of 2000 and 2008 by lowering rates substantially. The current low-rate regime shows that the RBA is following the economy closely and being relatively accommodative. This has helped the Australian stock market.
It is clear that Australian stocks are subject to a certain degree of volatility and at the present time are a bit highly priced.
The question that has to be asked at this point is where should one invest in Australia, assuming that diversification from US dollars is a strategy that will help to hedge possible depreciation of the greenback. There are endless possibilities. Government paper does not have an attractive yield and should be avoided. Australian banks are relatively solid and produce dividends. It is possible to invest directly in one or more banks or to purchase an ETF. The mining sector has relatively high volatility and is suitable for investors with little aversion to risk.
A sector that is interesting is the wine industry. There are many small wine companies that produce good wine. There are currently 4953 Australian wine producers. Many of them produce very small amounts, less than 5,000 cases. Investors who like good wine could look for a company that produces a wine that they like.
There are several websites with information about wine companies. See the Wine Gourd, for example. There is a lot of interest in wine companies, and values are rising. The Chinese are buying lots of vineyards and wineries. There are lots of vineyards for sale with prices ranging from Aus$ 100,000 to Aus$ 250,000 per hectare, depending on the quality of the grapes, land, exposure, etc. There is a certain risk involved in the wine business, as one can have good years and mediocre years.
In conclusion Australia at the moment is a good choice for US dollar diversification. The Aussie dollar is cheap and should not depreciate very much in future. There are several investment possibilities in ETFs, stocks and direct investment, including vineyards. If the US dollar is going to depreciate in the near future, buying Australian dollars now could be a good move.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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