This article was published on 17 May 2005. Some information may be out of date.

The message in the foot and mouth threat

The “Invest offshore” message was loud and clear the other day, after the news broke that somebody may have released foot and mouth disease on Waiheke Island.

By the time you read this, the claim may have been proven a hoax. Here’s hoping so. If that’s the case, take warning from it.

If it’s still not clear whether the threat is real, now is the time to review how much of your savings are in overseas investments.

If — heaven forbid — an outbreak has been confirmed, cross your fingers.

There’s nothing like a threat like this to bring us New Zealanders face to face with our vulnerability.

A food and mouth outbreak could cut our gross domestic product by $6 billion in the first year and $10 billion in the first two years, according to a paper by the Reserve Bank and Treasury. “The loss will continue to increase because potential output is permanently lower,” says the paper.

It goes on to say that, “What is not accounted for is the impact of such an event on the financial sector.” One thing is certain, though: that impact would be huge.

The typical New Zealander, with a job, house and savings all in this economy, would be kicked in the gut. His or her neighbour, with considerable overseas savings, would be somewhat less affected.

The easiest way to invest overseas is via a New Zealand-based fund that invests in world shares.

“Hang on a minute”, you might be saying. “Those funds have performed really badly lately.”

That’s quite true. In the first few years of this decade, world share values plunged, and the rising Kiwi dollar made that even worse for local investors.

In the last year or so, returns have gone back into positive territory, but the performance has still been eclipsed by the New Zealand share market.

However, the very fact that this decade’s performance has been bad should actually encourage offshore investment.

While I strongly disagree with trying to time markets — because we simply don’t know what will come next — history shows that you’re better to get into a type of investment that has been performing badly lately than one that has been performing well. There’s more room for growth.

But how do we know there will be growth?

We don’t, in the short term. But it’s important to look at the longer term. Any investment in shares or a share fund should be over several years, preferably more than ten. Over shorter periods there’s a fairly big chance that you will lose money.

Since 1970, world shares have grown on average at 11.5 per cent a year, including dividends, compared with 11.6 per cent in New Zealand. It seems likely that in the future, too, long-term performance in the two markets will be similar.

What’s more, there’s a reasonable chance that world shares will do well when New Zealand ones don’t and vice versa.

As reported in this column a few months back, a study of the 120 three-month periods in the last 30 years found that both world and New Zealand markets grew in 65 of the quarters, and both dropped in 18 of the quarters.

But in the remaining 37 quarters, when one dropped the other one rose.

In other words, if one market falls, there’s a two-in-three chance the other is rising.

If, in the near or far future, our economy is crippled by foot and mouth disease — or another agricultural threat, a massive earthquake, tsunami, eruption or other disaster — it would be a big comfort to have offshore investments that are growing.

Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd FSCL, a seminar presenter and a bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.