Mark Lister: Poison threat reminder of economic risks

There are many great global companies in which people can invest. Photo / AP

Opinion

Investors can build up protection by diversifying to include global assets.

When news broke of the 1080 baby formula threats, there was an immediate financial market reaction. The currency weakened by more than a cent, interest rates fell and the sharemarket turned decidedly cautious.

The potential human consequences aren't lost on anyone, and any economic negatives would be irrelevant if such threats became a reality. I myself have two little people at home that drink milk formula every day.

I strongly suspect that those behind the threat are simply nutters without the means to follow through, even if they were serious about it.

However, the market reaction and the international attention these threats have received is a timely reminder of some of our economic vulnerabilities. This gives investors a good reason to review their strategy to ensure they have considered these issues.

With a small, vulnerable economy that is highly dependent on agricultural exports for its future prosperity, there is a lot that could go wrong. We also need to worry about the weather, natural disasters and diseases that threaten our agricultural industries.

If something did happen to cause a major destabilisation in one of our key industries, it would flow through to every sector of the economy. It would impact businesses, cause job losses and reduce house prices and farm values.

We can't make these risks go away. All investors can do is acknowledge them and build some protection into their investment strategy. In my opinion, the best safety barrier is to diversify your investments to include global assets.

However, many local investors are good at finding reasons not to invest overseas. They will cite the strong New Zealand dollar which has eroded global returns in recent years, our sharemarket which has been very lucrative, our higher interest rates and the imputation credits that make local shares more attractive from a tax perspective.

But the argument for having some of your money invested offshore isn't based on the most likely scenario. It's based on the ones that we hope won't ever eventuate, but which would have a huge impact if they do.

For those that want to invest outside of New Zealand, there are options aplenty. Investors can buy index funds that will give them diversified, low-fee access to just about any region or theme in the world. There are also a plethora of wonderful global companies to invest in like Visa, Nestle, Google and Unilever.

Whether to hedge the currency or not is always a topical issue when it comes to overseas investment. Investors with large amounts invested overseas may want to do this, but smaller allocations to global assets can generally be left alone. Having some exposure to overseas currencies is an additional protection against an adverse event.

The NZ dollar fell sharply when the news of the 1080 threat broke, just like it did after the botulism scare in 2013 and the Christchurch earthquake in 2011. During 2008 and 2009, the currency fell 37 per cent in the space of a year, from US.80 to US.50 as investors' risk appetite collapsed.

It wouldn't take much to dent a small, vulnerable economy such as ours, and it makes sense to have some of your savings invested outside New Zealand, even if it's just as an insurance policy.

Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.