How to Buy International Stocks If The Dollar Stays Strong
Investors should have a diversified portfolio, and besides domestic stocks, they should also own international stocks. Investing in foreign companies and holding their shares means that you will also be influenced by the currency that is in place in that foreign country. Your international shares’ performance will also be affected by the movement of that currency.
Still, stocks and currencies do not move at the same speed. Currency movements can go in both directions, make your stock profitable or turn it into a complete loss. The dollar I stronger than the majority of currencies, and when foreign investors from America get their return from an international stock, the profits seem not to be that significant once they are converted into USD.
Hedged funds can neutralize the volatility of foreign currencies and the return. There are plenty of foreign hedge funds that can keep your returns safe. Unhedged funds, to the contrary, increase the volatility of foreign currencies for the sole reason that unhedged investors are exposed to it, whereby they do not stimulate growth in value.
Looking at it from a long-term perspective, the currencies’ influence will retreat over time to some extent. Still, it takes many years to do so. To gain from unhedged foreign equity, one has to hold the stock for more than ten years according to many analyses. Only then does the currency start to show a smaller impact on the stock. Since the stock market is rather a liquid and fast market, many opt for hedged fund investments in order to see the stock perform faster.
But we can also put things this way: The new US administration wants to encourage American exports which is the goal of the current US leadership, but that would mean that the dollar has to be weakened in order to attract foreign customers. If this would happen, and the strong dollar really starts to drop in value, unhedged fund investors will have an advantage in the market.
As an investor who also likes to hold foreign equity, one may opt for a mixed portfolio, a little bit hedged, and a little bit unhedged. Divide your exposure to foreign currencies into two parts, one hedged and one unhedged. In that way, the investor stays protected to some extent and reduces the risk, whereby they have the security that not all of his assets will suffer (or benefit) from exposure.
The economy is uncertain nowadays, and investors need to observe carefully what the leadership decisions will be like. They will heavily influence the economy and the value of the currency and define the course of the movement. As it has not been hard enough already, investors now have to pay double attention and take into account the outcomes of major financial decisions.
Still, many financial advisers say to stay away from foreign stocks, since they are cheap compared to domestic stocks, and that means that they will not boost performance (right now).
The History of The Dollar performance vs. Foreign Currencies
When we look at the past several years, it is noticeable that US investors increased their investments in foreign stocks, but the results were not satisfying at all. Their domestic equities have always been one or two steps ahead of the foreign ones in terms of performance. Especially after the financial crisis of 2008, the US dollar performed significantly better than foreign currencies.
Even if the lack of foreign stocks performance has been going on for decades, some US financial specialists think that foreign investments should be still kept. They base their theory on the past and list the reasons what influenced the foreign stock markets to lag behind their US counterpart.
The specialists, who advocate for an ongoing practice of foreign investments, go back to the 1940’s to explain their point of view. They argue that some markets were completely wiped out after WWII and that the foreign markets bear these consequences even today. Another example from the past is the decade of the 1990’s, also known as the technology boom in the USA, driving up US stocks to new heights.
Still, we cannot regard the foreign currency markets as one, they also vary from country to country, and countries which have a strong currency, like the UK with its GBP, can make the investment worthwhile if you own stocks of a British company.
Another example is the Swiss Franc (CHF) which has proven to be steady and more stable than the rest of the major foreign currencies, and the CHF is probably not going to wipe out your returns on Swiss stock once converted to the USD.
The movement of currencies is defined over a long-term period, and it takes some time on the stock market to get the desired returns, especially after the financial crisis 2008 which requires investors to be patient when investing in foreign stocks, since they will need some time to perform well against the USD.