The valuta effect – the impact of currency fluctuations on your investments

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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.

 

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EUR/USD currency over 1 month – source: Bloomberg

 

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%.

 

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EUR/USD currency over 1 year – source: Bloomberg

 

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.

InterestRates-US-EU.png

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.

  1. When you get $1.05 for 1 euro, you will have to spend € 5714,-
  2. When you get $1.10 for 1 euro, you will have to spend € 5454,-
  3. 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:

  1. When the EUR/USD is 1.05, your $30.000 would be worth €28.571. 
  2. 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:

  1. 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.
  2. 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  🙂

15 thoughts on “The valuta effect – the impact of currency fluctuations on your investments

  1. I’m certainly not an expert on currencies but as long as you have a diversified portfolio of companies whose revenues come from different currency regions you should be fine. For instance, UK companies will report very good revenue growth if they have continental Europe activities and vice versa. If you live in Euro land and your costs are largely in Euro too you should make sure you earn Euro’s too. My dividend income is partially paid to me in EUR and partially in USD. I typiccally convert the USD back to EUR every now and then.

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    • Diversification is indeed pretty important. And we didn’t take into account revenue differences within a company, so good point there.

      On the long term the risks will be spread out more, especially when the portfolio grows along every year. But it’s just a good thing to keep in mind 🙂

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  2. It’s really a complex question for European investors. I personally don’t want to time the market in relation to FX rates either. (I wish I could time the market well, but I know that I can’t) Yes, the USD got quite strong, but can’t it go stronger? I have no idea. Fundamentally it makes perfect sense now. Look at the spread between US and German bond yields. Money is flowing into the US now also because of this.
    As European investors this is not necessarily a bad thing. We might start looking into European companies with large US export business, without having any FX risk on the share price. At the same time the value of our US stocks is going up, especially in EUR.
    Because I’m planning to invest in US stocks on a long term, I’ll keep buying them irrespective from the FX rate. This is the real DOLLAR cost averaging 🙂

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    • I think nobody can really time the market, so why try? From this perspective, the actions you should or shouldn’t take are much different. And for the long run, a very good one as well!

      And I agree on the concept of companies having exposure to foreign currencies. We left that out of the article, but is something to keep in mind for sure. It’s just that much harder to measure 😉

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  3. Love the discussion on foreign currency. Most of my portfolio (probably 65% – 70%) is in US stocks. However, I’m still exposed to a great deal of foreign currency because some of my holdings have decent foreign income, which has been a headwind for their profits over the last 18 months or so.

    I actually do own a few stocks in Canada that trade both on the TSX and on the NYSE/NASDAQ and it’s interesting to see how the returns have diverged between the same stock due to foreign currency!

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    • Certainly is interesting! We also recognize the higher profits due to currency fluctuations, hence why we noticed how big of an impact it could have.

      Interesting outlook on having stocks on different markets, it probably gives a much more detailed insight on this take!

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  4. I’ve always just taken the view that currency effects will probably even out in the long run. As long as my companies are still increasing their dividends in their “home” currency, I’m fine with how they are going. Some years I might get a little more, and some years a little less, but thats ok.

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  5. I have dollar index funds and euro index funds in portfolio and rebalance to keep my desired ratio between the them intact. This way I always sell high and buy low. I share ADI’s view that in the long run currency effects are irrelevant.

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    • Thanks for sharing! As long term investors there a lots of advantages. But than again the effects can be so large that it might be of help to choose between companies for example. In your situation you got that tackled already 🙂

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  6. Great summary, would recommend it to anyone who is trying to figure out the impact of currency fluctuations! Thanks for putting this together Divnomics. Currency is the one thing that is holding me back from purchasing a stock like UL versus KMB. Just not something I have felt like dealing with.

    Bert

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    • Curious on how you look at it, maybe for a new blog post? 🙂

      We are very familiar with the company and it might give us a different perspective, but I believe there is still a lot of growing value in there.

      Liked by 1 person

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