The outbreak of foot and mouth disease in the United Kingdom is a salient reminder to investors of the need for contingency planning and portfolio diversification.
Arcus Investment Management says although the risks of foot and mouth hitting New Zealand are very low the event has highlighted an area of risk for New Zealand investors.
"A local outbreak of the disease could have significant implications for a primary producer like New Zealand," it says.
Arcus has put in place a contingency plan which involves significant shifts in share ownership and asset allocation, should the disease hit either New Zealand or Australia.
"A course of action has also been mapped to re-weight portfolios both at an asset allocation and sector level which will be implemented immediately in the unlikely event of an emergency."
It says that with the increasingly mobile global population, higher tourism numbers and trade globalisation one can’t ignore the risk to New Zealand’s economy.
"We believe the most serious effects of the disease will be manifested in the dairy industry. Dairy cattle may suffer a loss of milk yield whereas abortion, sterility, chronic mastitis, and chronic lameness are also commonly occur," Arcus says.
"More importantly the effects associated with the impact on international trade have export implications for New Zealand with few countries accepting animals or animal products from foot and mouth infected countries."
While the primary sector would be hit hard by an outbreak of foot and mouth in either New Zealand or Australia, other sectors would benefit.
For instance companies that export goods would benefit as the New Zealand dollar would fall significantly. Of those companies the ones which weren't constrained by hedging policies would look like reasonable investment prospects.
Head of bonds Mark Brighouse says such an event would have a number of effects. The first round ones revolve around the impact on the primary sector, such as exports. The second round, which is far more difficult to quantify, relate to flow-on effects for the economy.
For instance the dollar would be down, more people would be unemployed, consumer spending would decrease, the price of imports would rise and the government would have to bail out farmers.
At the asset allocation level bonds would be sold down as the Government would be forced to run deficits to help support the rural community.
Brighouse says foot and mouth is a useful reminder of the need for New Zealanders to diversify their portfolios offshore. He says any investor who has all their assets in New Zealand would be heavily hit if foot and mouth came to Australasia.
Head of equities Simon Botherway says the firm would likely invest a greater proportion of its funds in offshore shares.
While Arcus has done some contingency planning it has also taken out currency cover for a three-month period as a protective option. The length of cover is designed to fit in with the seasons as foot and mouth doesn't thrive in the summer.
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