Impact of Currency Movements

[WessexBoy]

I'm new to this and have put toe in water with some global exposure to equity indexes.

The $/£ fluctuations seem to overwhelm.

[dspp]

I'm new to this and have put toe in water with some global exposure to equity indexes.

The $/£ fluctuations seem to overwhelm.

Short term yes (months, years). Longer term (decades) it tends to average out. But even when overwhelming it pays to remember that half the time it is the good sort of overwhelming.

regards, dspp

[DiamondEcho]

These are somewhat unusual times. When Sterling rallies, it being negatively correlated to the FTSE-100 earnings (broadly speaking), it's bad for the index. Hence BoE sabre-rattling re: interest tax rises is one element of FTSE negativity and volatility. IMO we're getting a solid dose of that this week.

[LooseCannon101]

I wouldn't worry too much about currency movements so long as you have broad equity exposure that equates roughly to that of a world equity index.

The pound might fluctuate by +/-10% as compared to the US dollar but your equities will retain their purchasing power, similar to that before the currency movement.

[WessexBoy]

These are somewhat unusual times. When Sterling rallies, it being negatively correlated to the FTSE-100 earnings (broadly speaking), it's bad for the index. Hence BoE sabre-rattling re: interest tax rises is one element of FTSE negativity and volatility. IMO we're getting a solid dose of that this week.

Yes, I've noticed that -ve correlation which began when Brexit was the vote.

The rise in S&P 500 index and decline in $ also.

[DiamondEcho]

I believe you saw through my typo, but for the sake of clarity, since it's a been a major theme in the background this past year:

BoE hawkish/rate-hike noises > Sterling strengthens > hammers the converted earnings of UK companies with foreign currency income > hits the FTSE, FTSE-100 especially since the index includes many companies with material foreign revenue.

Hence the 'running commentary' on UK interest rates coming from members of the BoE-MPC is watched very closely indeed.

[richfool]

Considering that most of our (a UK resident's) assets are in sterling, - such as house, possessions, savings & many if not most investments, I favour having a significant exposure to other currencies through whatever means I can, which usually means through my investments. Once bought, I then have the capital value as well as the dividend income diversified into the foreign currency involved.

If sterling depreciates, as it seems to continue to do over the longer term, then I benefit (e.g. through enhanced dividend income, or proceeds of subsequent sale of the investment/asset). If sterling appreciates in value, (which it never seems to do enough to recover the value lost in previous falls!), then I will still be happy, because things like my overseas holidays and spending will cost me less and I still have my UK investments and assets. So I see it as a win win situation. My UK normal cost of living type spending is covered by my UK pensions (income).

[DiamondEcho]

That would be working if you had made the capital investments before Sterling begun depreciating. I'm not sure what a useful start-point on that might have been, how far back materially pre-empted where we are now, for example I still recall over US$2 to the £?
I think there is a closer correlation between the US and UK economies, and hence their interest rates. No surprise their economies arguably have more in common than those of the rEU or elsewhere. But if you are buying a UK share with foreign derived income now, the current price already reflects the stock and FX markets future expectation re: FX rate/respective interest rates. That's why the current hawkish BoE is hitting the FTSE-100 exporters share prices.

[richfool]

DE, I took that view, stance and position some years ago, (though unfortunately not as far back as the US$2 to the £ era). I added further to those positions immediately after the Brexit referendum. They include most global sectors, including US, European & Asia Pacific. I am not proposing to add further at this time. (Though if the £ recovers further, I might indulge in an overseas trip.)

[WessexBoy]

Having many assets necessarily priced in Sterling (house, NS&I savings) as well as assured income from pension, I agree that there is diversity in having invested in equity (indexes) that are globally exposed, esp. to US economy. And thanks for the comment that much of the FTSE 100 -ve correlation with the £ is because of the dependence of those UK companies on foreign earnings - ie a markdown/markup that is value led rather than led by demand/supply when trading stock.

What has struck me most is the effect that currency movements have had on the volatility of those investments when displayed in my local currency, ie £ Sterling.

Of course I am also a little miffed that the timing of my purchase has meant that I am about 1.7% down on VLS80 & down 2.9% in S&P500. Maybe miffed is not the right phrase, but I would have preferred to feel smug had instead those %ages been +ve . This is based on but a small fraction of total funds available as I am long on cash at present while I learn more about my risk tolerance. BTW I do recognise that the S&P500 features in the VLS80 portfolio.

I am off to the States later this month, so a strong £ offers greater spending power, almost bringing the iPhone 8 within reach ... (Actually I was wondering about the prospect over there of a heavily discounted 7+ by the end of October!)

[WessexBoy]

re-reading and reflecting, I think my phrase "esp. to US economy" needs qualifying, although I have less feel for other global economies/markets, and less knowledge about how to invest in index trackers. I presume that's what the Vanguard LS portfolios are for.

Setting aside other developed economies, such as Europe, Canada and Japan, I see that the FT has a piece on the Three Indies

"Who then makes up this new growth engine? It has three flywheels: Indochina, the modern-day East Indies and the Indian subcontinent.
* Indochina embraces Vietnam, Laos, Cambodia, Thailand, Myanmar and Malaysia.
* The East Indies takes in the archipelagos of Indonesia and the Philippines with Timor Leste, Brunei with arguably the Malaysian states of Sabah and Sarawak also members.
* The Indian subcontinent covers India, Pakistan, Bangladesh, Sri Lanka, the Maldives and Nepal. And, at its geographic heart, Singapore can already claim to be this region’s entrepôt.

"The three regions have 2.4bn people, almost a third of the world’s population: Indochina, 270m; the Indies, 375m and the Indian subcontinent, 1750m. It comprises seven of the world’s top 20 most populous nations including — by 2025 — its most populous: India."

That at least would prevent me from obsessing about currency fluctuations as I would have no chance of observing what the £ was doing against that basket of currencies.

btw, who is the local guru on India's economic prospects over the next 5 years?

[DiamondEcho]

Is this^ a genuine quote!? There is SO much incorrect, just really dumb incomprehensible errors in what they say, that it's jaw-dropping, really.

Indochina includes Thailand, Myanmar and Malaysia? - lol!
The 'East Indies' is a term from about 300/+ years ago, and more open to modern re-interpretation, but AFAIUI derives from the interests of the original British East India Company.
The 'Indian Subcon has at it's it heart Singapore', genuine lol!? What are these people smoking!

[WessexBoy]

Indeed it is a direct cut&paste

[PinkDalek]

Indeed it is a direct cut&paste

It is a copy and paste from

https://www.ft.com/content/57e6ef04-9df ... 2067fbf946

To aid non-subscribers, use Three Indies set for return as dynamo for global growth as a search phrase.

[StepOne]

It's not a direct quote - bullet-point asterisks were added which makes it look as though the statement about Singapore being at a geographic centre refers only to the Indian Subcontinent. In fact if you read the article it's clear that they mean Singapore is at the geographic centre of the entire Indo-china/East Indies/Indian Subcontinent area.

[WessexBoy]

It's not a direct quote - bullet-point asterisks were added which makes it look as though the statement about Singapore being at a geographic centre refers only to the Indian Subcontinent. In fact if you read the article it's clear that they mean Singapore is at the geographic centre of the entire Indo-china/East Indies/Indian Subcontinent area.

Sorry, my error then. I tried to improve the readability but it was late & I screwed up

[WessexBoy]

Fair use quote:
"Who then makes up this new growth engine? It has three flywheels: Indochina, the modern-day East Indies and the Indian subcontinent. Indochina embraces Vietnam, Laos, Cambodia, Thailand, Myanmar and Malaysia. The East Indies takes in the archipelagos of Indonesia and the Philippines with Timor Leste, Brunei with arguably the Malaysian states of Sabah and Sarawak also members. The Indian subcontinent covers India, Pakistan, Bangladesh, Sri Lanka, the Maldives and Nepal. And, at its geographic heart, Singapore can already claim to be this region’s entrepôt."

[WessexBoy]

The effect of fluctuation in £/$ is illustrated by these two plots of S&P 500, the first in $ and the second in £:

https://markets.ft.com/data/indices/tearsheet/summary?s=INX:IOM

http://www.hl.co.uk/shares/shares-search-results/v/vanguard-funds-plc-s-and-p-500-etf-usdgbp

[WessexBoy]

Diverting read but - genuine question - does your focus on the Euro & Brexit go any way towards an explanation for the £/$ fluctuations and the likely effect these (will) have on returns in £s for this UK investor in Vanguard 80% and VUSA?

[TimR]

I was wondering if anyone is using Hedged ETFs to mitigate some of their currency exposure.
I know Hedged Etfs are available for 'All World' as well as the individual regions of - USA, Europe and Japan. It depends on where the £ is going to go from here. Obviously the best time to have bought these would have been during the end of last year when the £/$ was around 1.21.
Tim