It’s common knowledge that a lot of the companies paying dividend for many years are based in the US. Being an European investor, it isn’t really a problem. We can buy (almost) every stock we want and the currencies are automatically being taken care off. Easy as that. Although, because it happens automatically we also don’t really know how much currency fluctuations is effecting our portfolio. So, time for me to check it out already.
In hindsight it feels a bit off that we are already investing for 2 years, but never really looked deep into currencies and their effect on investments. Of course we keep an eye out once in a while and check the EUR/USD rate. We do this in order to postpone a planned buy in US stocks or the other way around. We are still personal finance bloggers, and we don’t like paying more for a stock than really is necessary.
Currently the value of the euro has declined sharply against the dollar. Especially after the Trump election. For example: if you had 1 euro two weeks ago, it was worth 1.11 dollar. On the 18th of november you’d be left with a meager 1.06 dollar.
Doesn’t look very impressing? Just take a look below. Following the trend-line for over 1 year, you can clearly see the high impact and recent downfall. And realize that in 2014 one euro was even worth a solid 1.38 dollar. So the dollar clearly gained in strength for the past 2 years now. You may think that it’s only about a few cents, but the worth of the euro actually declined with -23%.
Some (Dutch) media blame it on the growing populism in both the US and Europe, which is pushing the dollar/euro exchange rate closer together. Which is quite easy to follow.
Since Trump was elected President on november 9th, the EUR/USD rate decreased with -4.5%. Just before the election day the euro was still worth $1.11, instead of the $1.05 now. The currency fluctuated a lot, and moved up and down sharply on a day to day base. This was so strikingly that the word ‘parity’ was buzzing around again. This means that the dollar and euro would be equals in worth, namely: 1 dollar = 1 euro. Something which rarely occurs (only twice, ever). And might be happening again in the near future.
There is another more obvious reason: the monetary policies of the FED and the ECB are totally diverging.
Whereas you can see above, and probably have read already, the FED is keen on increasing rates and might do it again this december. The expectations are Trump will boost the economics with his tax-reductions and investments plans, which can lead to an increase of inflation. In order to curb this inflation, rates will go up. An higher rates means higher returns on US. And leads to a more in demand currency and therefore a more expensive one.
In the Eurozone however, analysts expect a very low interest rate. This is why the ECB shall continue to expand their quantitive easing program and therefore decrease both interest rates and the Euro.
The effect on your portfolio and investments
We’re investing for only 2 years now. Which means US stocks have become more and more expensive for us. Reason enough to check how expensive that might be now.
What if you want to buy a US stock, as a non US-inhabitant? For example you want to buy 100 shares of company X, which has a price of $60 per share. We calculated how much it would cost you in three different situations. When the EUR/USD is 1.05, 1.10 and 1.11.
- When you get $1.05 for 1 euro, you will have to spend € 5714,-
- When you get $1.10 for 1 euro, you will have to spend € 5454,-
- When you get $1.20 for 1 euro, you will have to spend € 5000,-
So the decline of the EUR/USD in the past 2 weeks will cause you to pay almost 300 more for the exact same number of shares. And even over €700 more over a longer period of time.
Makes you think about how to get the best return on your money…
Let’s try another example, but then the other way around.
What if you have several companies in your portfolio, but all are US based. With a total worth of $30.000. This one we will place in only 2 situations, that are more current. The setting of a 1.10 and 1.05 EUR/USD rate. With a portfolio worth $30.000, were calculating the worth back in euros. How much difference will there be on only $0.05? Let’s take a look:
- When the EUR/USD is 1.05, your $30.000 would be worth €28.571.
- When the EUR/USD is 1.10 however, your $30.000 would be worth only €27.272.
So those 5 cents would make a difference in your portfolio worth of almost €800. This means that your portfolio value could decrease with -4.5% in only 2 weeks time… And only because of the valuta effect. This has nothing to do with changes in stock prices.
This is how big the impact could be on you investment portfolio.
Currency fluctuations has 2 major effects on how to deal with your investments:
- the dollar oriented stocks you bought 2 years ago, are far more worth now. The currency rate has an inflated effect on the worth of your portfolio, which can paint a far more positive image of a companies market return than it actually is.
- Everything you buy now, might become less valuable over time if the EUR/USD is going to increase again. Which is the direct opposite of stated in reason number 1.
From our stand of view, now might not be a good time to pour all our money in US based stocks. However for US-residents it just might be a good thing to look for investments overseas. For you this currency rate gives an, almost rare, opportunity to buy some high quality EU stocks for far less than you would normally pay. If you have your eyes on Unilever because of the recent drop in market price, this adds quite a bit of extra value for your money!
So what do you say? Does the valuta effect causes you the make different decisions? Might you buy more local or EU based stocks? Or do you just continue to do what you otherwise would have done? I’m very interested in your opinions, so leave some behind in the comments if you want 🙂