Currencies have been wildly volatile ever since the credit crunch. The dollar plunged, now it is soaring. The euro held its own, then Greece dragged it down. The pound has sunk lower and lower, and still hasn't touched bottom. If you split your life, property and investments between different countries, extreme currency shifts can be a real shock, as many expats are discovering. So how can you protect your wealth from dramatic swings?
Everybody has seen the impact currency movements have on your spending power when changing money at the airport, but the impact is multiplied when larger sums are at stake, says Ashley Clarke, director at financial and tax specialist advisers Dubai-IFA.com. "If you are buying a ?300,000 property overseas, and the euro falls 3 per cent against the dollar, that tiny movement could cost you an extra US$9,000 (Dh33,000). We have seen far bigger shifts lately; for example, the pound has fallen 30 per cent against the euro."
With pensions and other investments, the real impact is often hidden, Mr Clarke says. "Too many people fail to appreciate the impact currency movements have on their investments, until it's too late. We regularly take on new clients whose money has been invested in the wrong currency, giving them needless exposure to a country they have no plans to live in." You can reduce the risk with a little forward planning.
"If you expect to retire to the UK, for example, it makes sense to start shifting money into sterling long before you return home," Mr Clarke says. "But it isn't always that simple. Many expats have to second-guess where their career and personal lives will take them, and this makes planning tricky." However, it is not always necessary to physically shift your funds to the country in question, Mr Clarke adds. "If you are buying an offshore savings or retirement plan, you can generally choose between sterling-, dollar- or euro-denominated funds. You can invest in, say, a North American fund, but denominate that fund in sterling. And you can switch denomination as your personal circumstances change. But it is complicated, and you should consider independent financial advice."
Investors should also take advantage of weak currency. "If you have money in dollars or UAE dirhams and your long-term plan is to return to the UK, now is a great time to buy pounds. With sterling so weak, you should be filling your boots." Mr Clarke expects the US dollar to strengthen, which should please many in Dubai because the dirham is pegged to the greenback. "I wouldn't convert dollars into euros just yet, because the troubles afflicting Greece and Spain mean you will probably get more for your money later."
Many investors are surprised to discover how much currency exposure they have, says Steve Gregory, the managing partner at Holborn Assets in Dubai. "If you invest in a fund that is priced in sterling, and the underlying assets are in the UK, then you are 100 per cent exposed to sterling. But if your fund is priced in sterling and invests in, say, India, things are more complicated. In India, shares can be bought only with Indian rupees, so even if the fund is priced in pounds or dollars, the currency risk lies with the rupee."
And this can work in your favour, or against you, explains Mr Gregory. For example, "if you buy a property in Japan and its value increases 10 per cent, but the yen falls 10 per cent, you have made nothing. If the property goes up 10 per cent and the yen also goes up 10 per cent, you have made 20 per cent." Currency fluctuations also add to the risk of investing in emerging markets, because both the stock markets and currencies are typically more volatile, Mr Gregory says. "Funds invested in Russia that are priced in dollars but buy assets priced in roubles have risen by as much as 200 per cent. Part of the gain came from the sharp rebound in the local stock market, which fell sharply after Russia invaded Georgia, and part came from the strengthening rouble. So it really is worth paying attention to currency."
Some individuals actively invest in countries with weak currencies, then wait for the currencies to strengthen. "If you do this, look for markets that underperformed last year, because they could prove the stars in 2010. Don't buy high and sell low. I wouldn't jump into Russia, for example, just because it was the best market last year." Mr Gregory expects the dollar to continue to strengthen against sterling and the euro, but all three should wilt against emerging-market currencies in Latin America, Eastern Europe, India, China and the Far East.
"The West is struggling with bank bailouts, bankruptcies, higher taxation, plummeting property values, rising unemployment and war, and that is likely to hit their currencies," he says. "But movements are notoriously difficult to predict. Just when you sell all your dollars or euros expecting them to fall, they go up." Some people try to time currency purchases to take advantage of favourable exchange rates, and many people in Dubai have been patiently waiting for the dollar to swing back into favour, says Rebecca Hooton, a Dubai-based business development manager at the Global Currency Exchange Network, which offers foreign currency exchange for people buying property abroad or migrating to another country.
"The strengthening dollar is a great opportunity. Many have been setting money aside for a year or more, waiting for the right time to buy an offshore retirement savings plan, an overseas property, or simply send money home," she says. "We have seen a surge in interest from our Australian clients, because the strong Australian dollar has weakened slightly against the US dollar, and they want to take advantage of that."
But most people won't want to play the currency market, and should minimise risk instead, says Spencer Lodge, Middle East regional director at PIC/deVere, an independent financial advisory firm based in Dubai. "We suggest you invest in the currency you are paid in, and build a base-currency portfolio in the country where you plan to retire. If you don't know where you will live in retirement, as most don't, then build a diversified currency portfolio of funds investing in different countries and sectors."
Most advisers agree on one thing when dealing in two or more difference currencies: don't fret too much about short-term movements. "There is only so much you can do to mitigate currency risk," says James Thomas, the regional director of Acuma Wealth Management in Dubai. "Sometimes you will get a good exchange rate, sometimes you will get a bad rate. When I arrived in the UAE six years ago, £1 bought around Dh5.70. It has risen as high as Dh7.30, but is now back to where it started. If you are sending regular monthly amounts overseas, the currency swings should even out."