Of Fillies and Finance...betting on a rate rise?

Tuesday week is a golden day for those who love to back the odds.

The punters are furiously trying to deduce the winning horse in Tuesday’s Melbourne Cup, while economic pundits are jockeying for position to predict the possibility of a rate hike as the Reserve Bank holds its monthly meeting and as always, plays its cards close.

Inflation figures out on Wednesday were a lower-than-expected annualised 2.7%, so it seems unlikely the Australian Reserve Bank will increase rates above the current 4.5%. This will give borrowers a happy reprieve, for now at least.

The strong Aussie dollar and good harvests are translating into cheaper imports and lower cost fresh produce. This leads us to ask - what prices are actually rising? The answer is anything but shocking: electricity. It rose by 7% in the past quarter, 12% over the year and is likely to keep increasing.

Joe Hockey spoke of the Reserve Bank using interest rates as a lever to calibrate economic growth. How so? Well, in short the role of interest rates in Australia is no different from other Western economies – the cash rate is the price of money, and changing the rate affects the supply and demand of money. Using interest rates to regulate economic growth is called monetary policy.

When the Reserve Bank meets every month it considers many different economic indicators to work out when and to what extent it should use this lever: employment (which is up), Consumer price index (down), lending growth (slowing) and the global economic backdrop (risk of a slow down remains). All point towards the rate remaining at 4.5% when the board meets on 2 November.

So looking forward to Tuesday: the money seems to be on a constant interest rate at least for another month. It isn’t as easy to predict first over the line on the racetrack - or So You Think?

Parity time! ...offshore investing and currency risk

Yoohoo! Time to hit those online malls, or book that long due overseas trip. Yes, the little Aussie battler is enjoying its time in the sun. In the US, our fistful of dollars can buy a lot more juicy retail items than it could last month, year or 10 years ago. Fantastic! A decade ago our dollar bought US52 cents while now it’s on the cusp of buying one whole greenback. Last Friday night it actually surpassed US$1.00 for around 17 seconds! 

Along with being able to buy our favourite global brands more cheaply, comes the chance to buy US and global companies at far better value than previously. The past decade has not been a great time to be invested offshore as any positive returns were consumed by the strengthening currency, and most Australian funds invested in international stocks went backwards.

Australian shares represent about 2% of the global market so it makes a lot of sense to be exposed to offshore securities and nowadays you can do this relatively easily by buying units in Australian funds that specialise in overseas stocks. But before we rush off in pursuit of cheap US companies, we need to understand the impact of currency risk.

When we buy overseas stocks, in addition to the usual market risk we take when investing in shares, we also take on currency risk. This is essentially the risk we take as an investor that the currency will move in a way that reduces our return from our investments, despite their underlying performance being satisfactory. Obviously the converse applies too – the currency can move in such a way that it enhances your returns – and that is what many would be investors will be banking on as they start an offshore foray. Cheaper shares, and more for your dollar – a great combination!

As we know no-one can see into the future, even the gurus - our dollar may well still show upward movement. But chances are it will peak or plateau in the short-term, which means the timing may be perfect. Talk to your adviser before you take the plunge to fully understand the risks attached, or the hang-over may linger well past the celebration!

Eat, pray, love...spend, save, prosper - spot the difference!

Don’t laugh. Liz Gilbert’s mantra of self-discovery and wisewomen’s byline are more similar than they may initially seem!

In both cases the trio of little verbs encompass so much - abandon, endeavour and ultimately promise. Parallels?

Well we’ll start at the beginning: the feast. Eat, spend. Come on, not so different - both are essential to survival, both irresistible, sometimes enjoyed to excess. One of my favourite parts of Eat Pray Love the movie was watching Julia Roberts slurping her way through that delectable mountain of spaghetti. And who can shun the wonderful satisfaction following a successful day’s shopping, our arms overflowing, our purses empty? What would life be without these activities? Certainly a lot less enjoyable!

Onto pray and save – the more serious doing words muscling their way between gratification and actualization. They are underpinned with hope with an eye on the future. The driving force of having a goal and striving for something, they imply restraint, a sense of discipline and control. To perform these we need to harness our sensible or spiritual selves.

And then to our destination – the abundance of love, the luxury of prosper. These words represent the culmination of our striving, a blossoming of ourselves, a nirvana. And ultimately we can only reach this point when we are in a state of balance and understanding.

So the journey continues…will it be as dramatic and life-changing as that of Liz? Oh for a crystal ball - I only wish it could guarantee a blissful encounter in the arms of Javier Bardem!