The Amateur Financier

Perhaps the biggest financial news this week was that Australia, the Land Down Under, is the first G20 country to raise interest rates since the current (or just recently passed, depending on whom you ask) financial crisis began.  Yes, earlier this week Australia raised the interest rate offered by their central bank to 3.25% from the previous value of 3.0%, reflecting a strong Australian economy.  But the obvious question becomes: how does this affect me?

Well, if you’re an Australian, obviously what your central government does will have a large impact on your life and your finances.  The strength in your country’s economy indicated by the rise in interest rates will make it a more attractive target for investors, drawing in more foreign money and increasing the value of your currency (in fact, the above linked article noted the increase in the Australian dollar versus the US dollar).  The problem is that such an influx of foreign currency and also lead to bubbles in assets like real estate and stocks, as the foreign investors drive up the demand for your assets.

A satellite's eye view of the Land Down Under

Changes in foreign exchange rates will also affect the import-export balance, particularly in Australia.  For your Australians, this currency strengthening means that imports to your country will cheaper, since you’re trading more expensive Australian dollars for cheaper American dollars, British pounds, Euros or other currencies, depending on your particular trade partner at the time .  The downside, of course, is that your own exports will get more expensive, making it harder for other countries to import products produced by your country.

So, that’s what Australia can expect; what about the rest of the world?  Basically, you will see the exact opposite situation if you are from the United States, Great Britain, or the European Union.  The Federal Reserve (and its counterparts in other countries) has been keeping rates low for a while now, and is not expected to increase those rates until well into 2010.  This makes it easier for companies (and people) to borrow money, which will hopefully spur economic growth; but it means there’s a higher risk of inflation once the economy recovers.  Low interest rates also lead less response from investors, both domestic and foreign, complicating any plans that rely on heavy non-governmental investment.

But, What Should I Do?

Ah, that is the $64,000 question.  Being the cautious type, I would recommend doing more reading and research for the time being, ideally starting with some of the commentary I’ve linked to in this article and expanding your research from there.  Based just on what I’ve already mentioned in this article, you can probably see that even something as subtle as a one-quarter of one percent rise in central bank interest rates can have a ripple effect, not only in the central bank’s own country, but throughout the world.  I’ve only scratched the surface of how this can affect the global economy, and I’m sure a bit more research will leave you much more informed on what to expect.

As for actual investment suggestions, I would tend to stay fully invested in a diversified portfolio.  If you are a citizen of Australia (or Israel, Norway, or Brazil, all countries that have survived this downturn better than most), you might want to increase your domestic exposure a bit, to benefit as your economies take the first steps toward recovery much before the rest of the world.  Similarly, if you’re not a resident of one of the aforementioned countries (or another country that is actually doing well in the current economic environment), it’s probably worthwhile to consider expanding your stake into faster recovering countries, as companies there will have a competitive advantage over those in countries that are still struggling.  Just watch for signs that other economies are starting to recover, and you can shift your portfolio accordingly to take advantage of growth no matter where it occurs.  Happy investing!

(As always, it’s worthwhile reminding everyone that I am an amateur financier, not an expert.  Before you go shifting around your investment portfolio, be sure to do plenty of your own research, draw your own conclusions, and make the choices that feel right to you.  Attempting to profit from a single country ETF or stocks based in said country can be a way to benefit from differing rates of recovery, but they are also more volatile than broader funds, and should be handled with care.  Be sure that an investment plan is right for you before you enact it, and talk to a financial professional if you are uncertain of what to do.)

• Ten Steps to Control Your Finances: Step 7 & 8
• Investment Pyramid: A Broad Base
• Investing 101: Bonds

• Best Central Air Conditioners
• HGTV's "My First Place": Where are the Hazardous Content Warnings?
• Foreigners losing appetite for US Treasuries or Why interest rates are going up