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My portfolio: Buy local

By Angela Jones

Tuesday 1st March 2005

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When the New Zealand currency reaches levels we've seen recently - more than 70c against the US dollar and perilously close to parity with the Aussie dollar - conventional wisdom says it's due for a tumble.

After all, we know historically it doesn't often fly much higher. What's more, local interest rates may have peaked, prompting investors to seek fatter returns overseas. The domestic economy is bound to weaken at some point, capping the returns that can be earned at home.

But think again. Conventional wisdom doesn't work so well this time because, as savvy investors know, the level of the New Zealand currency has more to do with events offshore than those at home. The lacklustre performance of global stock markets and George W Bush's spendthrift ways could well mean the Kiwi keeps climbing against the greenback. Figures such as the US's staggering US$60.3 billion November trade shortfall are likely to keep investors away from the US dollar.

"It has almost nothing to do with New Zealand," says David Pretorius of Auckland-based hedge fund 36 South Investment Managers. "The US dollar just can't sustain these levels and so all other currencies must get stronger. It just doesn't make much sense for the average Kiwi investor to go offshore."

The good news for savers is that the Kiwi dollar is our base currency and we already benefit from high deposit rates and fat returns on property and stock investments. If you want to rev up your bet on a higher Kiwi, you're best to put money into local companies that benefit from a stronger New Zealand currency, says Martin Poulsen, head of investor services at First NZ Capital.

"MediaWorks is a good example of that, as it's a company that buys programmes priced in US dollars," says Poulsen. Carter Holt and other exporters are stocks Poulsen would be shy of should the currency rise in 2005, as their earnings are curbed when they bring money home from their offshore sales.

Global investment managers find some of their products are a hard sell in this country as our interest rates are some of the highest in the industrialised world. While the recent recovery in the US dollar saw the Kiwi near a two-month low of 69 US cents in mid-January, the expectation of still higher interest rates in New Zealand is likely to spark renewed buying of the currency.

The New Zealand dollar rose 10% last year as strong domestic growth prompted the Reserve Bank to lift the cash rate to 6.5%, compared with rates of 5.25% in Australia and 2.25% in the US. The RBNZ said late last year it may need to raise rates further to curb inflation, which it's compelled to keep between 1% and 3%. This could lure more international investors to New Zealand dollar-denominated assets.

High local deposit rates are "the biggest competitive factor that we see for us here," says Josephine Shaw, head of portfolio management for TOWER Managed Funds GAM, which has $220 million under management. Shaw says the Kiwi will likely keep rising as "there's still room for growth. The domestic economy still seems to be very buoyant. There's still room for interest rate growth."

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