Foreign Currency effects

In this article, we intend to highlight some factors that WILL affect your investment outcome.

We have come across countless amounts of savers and investors that are unaware of this or believe it does not impact them.

They think they could employ a strategy to inoculate their portfolio from any effect of currency fluctuations. There isn’t one, even if the money you have to invest, say it’s USD, is invested into a fund denominated in USD, and that fund only buys securities/ stocks denominated in USD. And the ultimate companies these stocks represent only transact and do business in USD. There will still be a business effect on the companies.

Exchange rates play a crucial role in any country’s level of economic health. This is why exchange rates are the most watched, analysed and governmentally manipulated asset class. They matter on both a large and very small scale. They WILL impact the actual return of any investor’s portfolio.

Many factors affect currency exchange rates :

• Differences in inflation. A country with a consistently lower inflation rate usually has a rising currency value countries with higher inflation typically see currency depreciate.
• Differences in interest rates via manipulation of exchange rates through central banks. Higher interest rates offer investors higher returns compared to other countries.
• Current account deficits are the level or balance of trade between a country and its trading partners. A deficit applies when a country imports more goods than exports and vice versa. When in a deficit, the country will borrow money from foreign sources to make up the deficit. This causes the currency to depreciate.
• Public debt. Governments engage in large-scale financing of public projects from borrowed money. Countries with large-scale public debt are less attractive to investors because they are concerned about inflation. Higher inflation translates into lower currency real value.
• Terms of trade. This term labels the rising or falling levels of its imports versus its exports. When the exports rise at a greater rate than the imports, this would be considered an improvement in its terms of trade and would typically improve currency appreciation.

Political stability and economic performance, investors look for stable countries with strong economic performance.

In a nutshell ..

.. one can’t avoid the impact of currency on one’s portfolio.

However, one can be more efficient in dealing with it.

Perhaps we deep-dived a little too much, but we want to point out that currency hedging and alignment are important and should be factored into your investment philosophy.