What is the best asset coverage in the world?
Economically speaking, Australians are very lucky people. We are also among the most ignorant. These truisms are superbly performed in the least understood but most important feature of the Australian markets.
What is the best asset coverage in the world? This, via the BNP
Our analysis involves two steps: a historical assessment of the most reliable G10 currency risk hedging, complemented by a forward-looking approach to determine how sensitivities will evolve based on current account dynamics and international net investment positions (NIIIP ). We analyze historical weekly returns of the G10 FX during periods of significant decline in the S & P500 to determine the best hedge against risk in the G10 FX. The data is adjusted for outliers, which we define as anything greater or less than 1.75 standard deviation from the observation of average return for a given currency pair. Figure 1 shows the average weekly returns during periods of a decline of at least 15% in the S & P500 using data since 2000. We capture seven of these declines with an average S&P decline of 24% per period, which gives 31 observations. The most risk sensitive AUDUSD. The exit suggests that the AUDUSD is the more sensitive pair with an average weekly decline of 1.5% during periods of massive stock market sell-offs. As shown in Figure 2, the distribution of returns shows wider left tails for AUDUSD and NZDUSD than the rest of the commodities block.
This coverage does not only apply to stocks. But also ownership and other local assets. The speed and depth of the AUD’s massive sell-off protects all assets from internal devaluation through the external crash.
Sadly, many Australians see the currency as too volatile and scary, which is actually its strength. AUD is the best asset hedging in the world and you’re crazy if you don’t fully utilize it by having large slices of wealth in the offshore markets.