Currency swings: How it can affect your investment portfolio

The ups and downs of global currency movements can affect how your investment portfolio performs, even if you do not directly invest in the FX market.

The forex market is a large and volatile investment platform. Given its highly unpredictable nature, it is most suitable for corporate and institutional investors who have the appetite for a high level of risk.

However, even individual retail investors who may not be directly exposed to the currency market may be vulnerable to foreign currency risk through their investment portfolio.

Impact of FX movement on your portfolio

As an investor looking to build and enhance your wealth, you have multiple investment avenues to choose from, be they direct equity, unit trusts, Exchange Traded Funds, bonds, structured notes etc. Besides parking your monies in Singapore-based investments, you also have the option of purchasing foreign denominated assets or investments for the purposes of gaining international exposure and diversification.

However, in the case of investment products that are valued in a currency other than SGD, the income received from them, such as sales proceeds, interests and dividends may be prone to risks associated with currency movement.

Let’s say you invest USD10,000 in a unit trust that has US stocks as its underlying investment. Over the next 12 months, suppose the unit trust has not budged in value but the USD has appreciated by 10 per cent against the SGD.

So even though the unit trust has not increased in value, when you convert your USD sales proceeds into SGD, you can now receive 10 per cent more SGD. On the other hand, if the USD depreciated by 10 per cent, with no change in the unit trust value, you would stand to lose 10 per cent in SGD terms.

Key to minimising FX risk on your portfolio

Since currency fluctuations can play a significant role in influencing the performance of your portfolio, keep the following pointers in mind when deciding on a foreign currency-based investment.

• Health of the economy

A country’s economy is a good indicator of the quality of its currency. A robust economy usually implies a powerful and stable currency as global investors are confident about the country’s future and are thereby keen to purchase assets denominated in that currency. So, do a check on a country’s economy before investing in its currency denominated products.

• Trading relationship

A country’s trading relationship with the rest of the world can also influence its currency. Typically, countries whose exports exceed their imports are likely to have stronger currencies due to the demand for their products. Hence, factor this in when making your purchasing decision for foreign currency-based investments.

• Interest rate scenario

A country’s interest rate environment may also reflect the future direction of its currency. Expectations of high interest rates automatically make the currency more valuable to investors whereas a possibility of low interest rates can make the currency less attractive.

Need for a long-term view

There is no doubt that currency movements are extremely uncertain, especially in the short-term. However, investing in foreign denominated assets is still a good idea as it can offer a certain degree of diversification. For instance, investments spread across foreign currency assets can potentially help you offset a loss in one market with gains in another.

Also, in the long run, currency movements are likely to even out due to economic cycles.

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