Hey all,
do any of you invest globally for a long period of time?
My question is, how do you assess the currency risk?
I've read somewhere that you don't have to worry about that because it's gonna set off in the long run.
while hedging costs money and extra capital to deploy, this will just reduce the overall return of portfolio, coz you could just deploy it somewhere that you think is undervalued.
my thoughts and observation is that:
if you invest in a region when it's unpopular and you do find a lot of undervalued opportunities, (eg. US after the crash, nobody touches US market).
at the time it's true that the currency depreciates and you get to buy stocks for peanuts.
but now, your return outlook actually has double in earnings potential.
as they stop QE and global capital flows back to the US, you get 2 returns.
1. stock market return, as your stock rises to fair or over valuation
2. currency appreciation as people start to shift back to US equities, ppl have to buy US currency
thoughts?
(12-09-2013, 10:21 AM)ikur1 Wrote: [ -> ]Hey all,
do any of you invest globally for a long period of time?
My question is, how do you assess the currency risk?
I've read somewhere that you don't have to worry about that because it's gonna set off in the long run.
while hedging costs money and extra capital to deploy, this will just reduce the overall return of portfolio, coz you could just deploy it somewhere that you think is undervalued.
my thoughts and observation is that:
if you invest in a region when it's unpopular and you do find a lot of undervalued opportunities, (eg. US after the crash, nobody touches US market).
at the time it's true that the currency depreciates and you get to buy stocks for peanuts.
but now, your return outlook actually has double in earnings potential.
as they stop QE and global capital flows back to the US, you get 2 returns.
1. stock market return, as your stock rises to fair or over valuation
2. currency appreciation as people start to shift back to US equities, ppl have to buy US currency
thoughts?
I have been investing regionally but not many countries. as a retail investor you can cross out hedging as your portfolio will not be big enough to hedge meaningfully. Currency is a big risk factor and the volatility is not helping.it will require you to have a bigger margin of safety then say in Singapore stocks. It is not even restricted to just buying stocks of that country, it also applies to stocks of Singapore companies that principally invest in overseas companies. stocks that has assets in Indonesia, India are recent examples.
I always thought invest in foreign stock market, is good when your country currency goes strong. For instance, I invest in Hong Kong, UK and US, when their currency goes weak during few years ago. Now, their currency bounced back, and it helps in the paper gain.
Long term SGD appreciates. Long term INR depreciates. That's why Indians like to buy Gold or keep money offshore.
Behaviours and incentive to invest overseas will be different because risk is different. Singaporeans invest overseas like the Japanese used to because primarily they feel everything is cheap relatively to SGD, rather than preserving their purchasing power.
I have some investments in US companies. Currency depreciation is a very real problem as a 10% rise in the investment cannot fully offset a 10% depreciation in the currency. It can only be offset if the portfolio is big enough to diversify across many different countries. I'm of the opinion that if you are worried about a substantial depreciation in the currency, you should not be investing in that country in the first place.
That said, i'm not worried about inflation in the US. I get to invest in much higher quality companies which I believe can compound a higher growth rate for a long time to come. They are also more shareholder friendly (e.g. they mean it when they say share buybacks and dividend increases) and disclosure standards are high (access to transcripts, proxy statements...)
USD has depreciated against SGD over 10 years. Likely much longer. If compounded annually probably around -2.5%.
A number of investors probably can cover this handicap however something to be aware of.
IMHO, I think investment returns shouldn't be greatly affected by currency appreciation/depreciation. My underlying assumption is that we are all looking for at least 50% returns (i.e. value investing). Unless we are in an emerging market environment where currency can depreciate by more than 30%, I think our margin of safety can safely hedge this "currency risk". That 10% volatility, we won't be able to predict it.
What I'm more concerned is relating to currency risk which affects the (invested) company's fundamentals. Are the company's foreign currency-denominated assets mismatched with their liabilities? A heavy dollarized debt liabilities will kill an Indian domestic-focused company now. And what about transactions? Are they mismatched as well? Think about it, in today's environment, an India-based company which purchased all raw material in dollars but sells in Rupiah will be hit the hardest and there is a leveraging built-in component depending on how long they hold their inventories on average.