How foreign exchange rates affect your investments

Foreign exchange rates: what to keep in mind when investing 

Investing internationally is an excellent way to diversify your investment portfolio and improve your long-term returns. However, to make your international investments work for you and grow your money, it is important to be aware of the risk so that you can manage these. One of these risks is fluctuations in the foreign currency that your investments are exposed to.  

Currency fluctuations are quite normal for most major economies, so it is important to consider the impact of these on your international investments. If you invest in an international company that shows good growth, you can still lose out on profit due to currency fluctuations. If you invest directly in foreign currency, the impact will be even more significant.


Different ways you are exposed to foreign currency when investing internationally

When investing internationally, you can be exposed to foreign currency either directly or indirectly:

  • Directly
    Investing in the forex market by buying and selling (trading) foreign currency or investing in an investment account or foreign shares that are denominated in foreign currency – meaning you invest in foreign currency, and your investment proceeds are paid in foreign currency.

  • Indirectly
    Investing in an investment vehicle that has exposure to international companies but that is denominated in rand – meaning you invest in rands and your investment proceeds are paid in rands.


In both these instances, it is important to consider the foreign currency your investments will be exposed to and to keep track of how the currency fluctuates.

 

A wealth manager can help you make an informed decision about whether investing directly or indirectly is more appropriate for you

 

When investing directly in the forex market, currency fluctuations will play a key role when you buy and sell forex. When you invest in foreign companies, the impact of currency fluctuations is not the only factor affecting your outcomes – firstly, you are betting on the growth of the company. If the company does well, and the currency remains strong, you will optimise your returns. In addition, the timing of when you will convert your returns to rands will also be informed by exchange rate movements.


Factors that influence foreign currency exchange rates

Strong and stable currencies that don’t fluctuate excessively offer the best chances of growing your investment returns over time.

  • Politics During times of political uncertainty and instability, a country’s currency will likely weaken, and inflation may increase. Political stability, on the other hand, is usually associated with a strong currency.

  • Economic performance Countries with strong economic growth generally have strong and stable currencies, while the currencies of countries with low economic growth generally have weaker currencies.

  • Interest rates Interest rates, which central banks determine, are directly linked to exchange rates. The higher the interest rate, the higher the exchange rate, and the other way around.

  • Public debt The more debt a country has, the higher the inflation rate and the lower the interest rate, which means a low exchange rate – especially if the debt exceeds economic growth.


Expert advice can help you make the most of international opportunities

While investing internationally can go a long way in helping you grow your money, it can be daunting to know where and how to invest. A wealth manager can help you make an informed decision about whether investing directly or indirectly is more appropriate for you, and to understand the role that factors like foreign exchange rates play in your portfolio.  


Want to know more? 

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