Finding yourself at the sharp end of unfavourable currency movements is expensive and painful, as many UAE-based expatriates have discovered.
Currency calculations are familiar fare for many expats, and the post-Brexit volatility of the pound has given these sums added urgency. But the good news for UAE residents is that their dollar-pegged earnings have become worth more relative to many other currencies, given recent strength in the US economy.
Richard and Carol Dale have lived outside the United Kingdom for almost six years but still have financial commitments back home and this requires them, as Richard puts it, “to ride the roller coaster of currency exchange”.
The Dales, both 51, have to service a mortgage on their UK property, plus council tax, utility bills and road tax for their car.
Currency volatility has made for a bumpy ride, but the strength of the dollar, especially against the pound, is making it a lot more comfortable.
The Dales previously spent more than four years in Australia, during which time the Aussie dollar sank from £0.69 to £0.49, which felt like a salary cut. “Some months we crossed our fingers just hoping the exchange rate would stay favourable for a bit longer.”
Richard, who works for a multinational engineering and construction company, says this was one factor in their decision to move to Dubai last July. “We were delighted to discover that the UAE-dirham is pegged at a rate of about 3.67 to the US dollar, which is great news, provided the US economy remains strong.”
The shock outcome of the Brexit vote has handed the Dales an unexpected windfall, with the pound falling almost 10 per cent against the dollar, boosting the value of their UK remittances.
Richard says: “We watched Brexit in amazement, as it really benefited us financially. We are taking full advantage by sending as much home as we can afford.”
They send any spare monthly salary to the UK via their bank, HSBC, which gives them a competitive exchange rate.
Like the Dales, other dirham earners should be looking to take advantage of their new-found spending power, in a variety of ways.
Currency
If you are thinking about sending dollar-pegged dirhams overseas, now is a good time to do it.
One year ago, each US dollar would have bought you GBP0.64. At midweek it bought GBP0.75, or 17 per cent more sterling for the same amount of money, such is the shock effect of Brexit.
The US has been the most successful global economy over the past five years, and this has boosted the dollar’s standing around the world.
For example, in August 2011, each dollar bought €0.70; at midweek it bought you €0.89, or 27 per cent more.
The greenback has soared against the Australian dollar over the past five years, rising more than 40 per cent from A$0.93 to A$1.31, and against the Indian rupee, up roughly 50 per cent from 44 rupees to 67 rupees.
Yet there are signs the long-term dollar surge is waning. The currency has actually dipped against the euro and Aussie dollar over the last year, which suggests that expats may want to take advantage sooner rather than later. The latest US figures showed GDP rising a disappointing 1.2 per cent in the second quarter, hit by shaky global demand.
Hans Redeker, chief global currency strategist at Morgan Stanley, recently forecast that the dollar will fall 5 per cent in the next few months, as the US Federal Reserve is likely to postpone anticipated interest rate hikes as US economic data worsens. The dollar fell 1.3 per cent in the final days of July, its worst week since April.
Others are more positive, including Chris Beauchamp, head of market analysis at IG Group, who says: “The pound and euro are unattractive post-Brexit and with the Bank of Japan likely to ease policy once more, the US dollar will be the big beneficiary. The greenback is likely to strengthen further throughout 2016.”
Gifford Nakajima, head of wealth development, UAE and Mena, at HSBC Bank Middle East, notes that dollar movements are impossible to predict. “It is important to keep in mind that the current strength of the dollar is relative to other currencies, and can change in any direction.”
HSBC has noted an increase in UAE residents making remittances home over the past month, particularly to the UK.
Mr Nakajima says you should avoid making transfers on the weekend. “Rates on the weekend and on public holidays are not ‘live’ rates,” he said, “and can end up being higher than when the markets are open”.
Processing transfer requests typically takes two to three working days, and this should affect your timing, Mr Nakajima says. “With the UAE being closed on Fridays, and international banks being closed on Sundays, Monday or Tuesday are the best days” to make a quick transfer, he said.
Transferring money to the same bank abroad is cheaper than sending money to another bank, which typically incurs extra fees, Mr Nakajima adds.
Most expats use their own banks when making transfers, but you should also check whether you will get a better exchange rate and lower fees using an independent currency transfer service such as Al Ansari Exchange, HIFX, MoneyCorp or UAE Exchange.
Property
Some UAE residents will want to take advantage of the lingering dollar strength to purchase properties overseas.
London was a prime market for foreign buyers until prices became too expensive, but now sterling’s crash is opening up opportunities again.
Will McKintosh, director, joint head of residential, Middle East and North Africa at property consultants JLL Mena, says Brexit is proving a mixed bag for Britain’s capital.
“We have seen growing interest as people know their money will stretch further, but many are also cautious, amid signs that the UK economy may be slowing sharply in the wake of the referendum.”
Mr McKintosh says that although there may be bargains in London today, buyers are holding out for greater bargains should sterling weaken further and UK house prices take a knock. “Some are waiting until the dust settles to see if there is a better opportunity in 12 to 18 months.”
Others are turning their sights to other European cities, with Paris and Frankfurt vying to challenge the City of London’s dominant financial services sector. Mr McKintosh says: “We have seen growing interest in Frankfurt and Berlin, where you can get attractive yields of six per cent or more, with a relatively low entry point of between €300,000 (Dh1.23 billion) and €500,000.”
Richard Bradstock, director at the international property investment company IP Global in Dubai, says that among UAE investors only the US, UK and Australia are more popular than Germany right now. “Berlin has gathered interest over recent years and has now become one of the most popular destinations to invest.”
Mr Bradstock says Berlin apartment prices have risen 10 per cent in the past year. “It should be on a the radar for any Middle Eastern investor as a city where their dirham can go further.”
He also picks out Australia but says Sydney is now pricey, with the average property costing A$782,000 (Dh2.18bn). “This is significantly higher than closest Australian competitor Melbourne at A$590,000, which is predicted to overtake Sydney as the country’s biggest city by mid-2050.”
Melbourne apartment prices have increased by an average of 5 per cent a year over the past decade, accelerating to 11 per cent in the year to February 2016. “Brisbane, Australia’s third-largest city and one of the fastest-growing mature cities in the world, is also on our radar,” Mr Bradstock says.
Stocks
The US has been one of the best global stock markets in recent years, with the North America investment fund sector returning 100 per cent over the last five years, according to figures from Trustnet.com.
By comparison, over the same period Japan returned 53 per cent, Europe (excluding the UK) returned 50 per cent and the UK All Companies grouping returned 47 per cent.
Emerging markets were even further behind, with Greater China returning 24 per cent, and the global emerging markets sector returning just 7 per cent.
The US continues to rise, with the S&P 500 index of top companies hitting a record high in July, as most earnings results beat expectations, although recent GDP slowdown has made some investors nervous.
The US Federal Reserve has not hiked rates since its 0.25 per cent increase last December. Tom Anderson, an investment adviser at Killik & Co in Dubai, anticipates one rate hike this year. “Given that central bankers from Europe to Japan are cutting rates, often into negative territory, and releasing new stimulus measures, this could strengthen the case for investing in dollar assets. “Continuing strength on the S&P 500 likely as the US is now the safe haven of choice,” Mr Anderson says.
He says the best way to invest in larger US companies is through a tracker fund, as the market is well researched and this makes it hard for active mutual fund managers to beat the index.
Mr Anderson says exchange traded funds (ETFs) have low annual charges, boosting your returns. Popular US ETFs include iShares MSCI North America, Vanguard S&P 500 ETF or SPDR S&P US Dividend Aristocrats ETF.
It makes more sense to use an active fund manager when investing in smaller companies, where hidden opportunities can be found, and Mr Anderson tips mutual fund Findlay Park American, which has grown 117 per cent over the past five years, according to Trustnet.com.
Among other markets, the obvious place to assess now is the UK. The FTSE100 has shown resilience: after a drop of about 6 per cent in the two days after the vote was revealed, the index rallied and at midweek was up 4.6 per cent since the vote.
To invest in larger UK companies you can try trackers such as the iShares FTSE 100 or HSBC FTSE 100 Index, while the HSBC FTSE 250 Index tracks the next 250 largest UK companies.
Mr Anderson says there may be better opportunities among smaller UK companies, which have yet to fully recover from the initial Brexit shock. He tips BlackRock Smaller Companies investment trust, which grew 73 per cent over the past five years, or BlackRock Throgmorton Trust, which grew 71 per cent. “Just remember that smaller companies are riskier than larger companies, although history suggests the returns can be higher in the longer run,” he adds.
The euro has also been weak since Brexit over fears that other countries may demand their own EU votes, he adds.
“The single currency has scope to strengthen over the next couple of years, especially if the crisis passes, and now may be an interesting time to invest in Europe.”
Mr Anderson recommends mutual funds BlackRock European Dynamic and Liontrust European Income.
The era of dollar strength may be a good time to invest in emerging markets, especially as some experts tip them for a revival.
Jan Dehn, head of research at Ashmore, says emerging markets have faced major external forces in recent years, including the strong dollar, the commodity price crash and the US rate hike in December. “Many investors panicked in the face of these shocks, but emerging market fundamentals have held up better than most expected.”
Mr Dehn says cheaper stock valuations have created plenty of value and could be a good entry point for emerging market investors. Fidelity Emerging Markets, Templeton Emerging Markets Smaller Companies and Stewart Investors Asia Pacific Leaders have all performed well and are worth considering.
pf@thenational.ae