Making a financial plan for the worst of times

Tuesday, 27 January 2026

Unemployed men being fed at a soup kitchen pose with the kitchen volunteers in Wellington, in this photo from the Great Depression in 1932.

Martin Hawes is a financial writer and presenter, and has written 25 personal finance books. He writes a weekly column.

OPINION: How would you fare if New Zealand had a major depression? I am not meaning a recession like the one we have had for the last couple of years, I am meaning a really big economic and market downturn akin to the 1930s depression or possibly worse. How would you fare?

There would be very few if any winners, but those who could ride it out best would be those who had significant investments internationally that were not hedged back to the New Zealand dollar.

A depression is no nice thought (especially when a lot of us are happily at the beach or in the mountains). However, unpleasant though it is, we need to think on it.

First, we would likely be faced with very high unemployment. Along with this we could see a collapse in the value of our currency and very high inflation as imports (eg oil) become very expensive.

This bleak picture would also likely see a severe fall in financial markets: shares, property and bonds would also be down. House values would also likely be affected creating more problems.

It is hard to know what could trigger such a cataclysmic event but possibly a natural disaster (think of the Alpine Fault with major earthquakes), or a major biosecurity breach (think of foot and mouth disease). And then again it could be more than one event coming together, or perhaps a continuing slow economic decline over years or a couple of decades.

Most likely, it would be something that virtually no one has thought about – the sudden appearance of a “black swan” when no one had ever thought such a thing could exist.

Investors and KiwiSavers need to be sure that a significant proportion of funds is invested globally and the currencies are not hedged back to NZ dollars

When you shift some investments from NZ to (say) the US you shift your exposures. We have two exposures: the first is the exposure that we have to particular assets – i.e. to different businesses. Investing in the US and Europe means investing in companies which carry on regardless of what happens in New Zealand.

New Zealand could disappear off the face of the earth (hopefully not!) and Microsoft, Visa, Nestle, and Siemens would carry on with regardless. On the other hand, if New Zealand had a major depression, companies like (say) the Warehouse and Turners Automotive would suffer.

It makes sense to diversify into other economies and not have all your exposure to New Zealand businesses.

The second exposure concerns the currency. When you own shares outside New Zealand, these shares will be bought and sold in their own currency. This means that you are exposed to the ups and downs of those currencies, such as US dollars.

Sometimes when you are not hedged, the currency changes can increase or decrease your volatility. For example, you might have some US shares; when share prices are down, it could be that the US dollar is also down which would mean you would have a double whammy. However, the blow of lower share prices can sometimes be softened by a rise in the US dollar.

Unhedged global shares will come with greater volatility because both the currency and share prices can move. I think that volatility is worth suffering for the diversification and comfort afforded by having some assets and currency outside this country.

The increased currency volatility from owning global investments can be eliminated by using futures contracts or options to hedge the currency. This means that you effectively own the global shares but own them in New Zealand dollars.

This hedging does reduce volatility, but it does not help in the event of some major economic disaster happening to New Zealand. If such a thing happened to New Zealand, you would be much better off being unhedged and so own your investments in foreign currencies.

Most private investors do not hedge the currency for their international investments, but fund managers (including KiwiSaver) will often use hedging to reduce volatility and smooth out returns. In hedging some of their currency exposures, their global investments are at least partially exposed to the NZ dollar which is not good if and when we were struck by a major depression.

I must admit to sleeping better knowing that the 40% of my portfolio that is in global shares is not hedged back to New Zealand dollars.

On a more positive note, there have been (and will almost certainly continue to be) excellent returns to be had when you take a global view of investment. The are brands, industries and technologies that you can only access by shifting money offshore. Remember that there are defensive benefits of international investment but there are excellent returns to be had as well.

Martin Hawes is not a financial adviser and the information and opinions here should not be taken as financial advice.