Saturday 21 April 2018

How can you shield your wealth from a weak euro?

This isn't the first time that investors have run scared of the euro
This isn't the first time that investors have run scared of the euro
Louise McBride

Louise McBride

Many of those putting their money into non-euro bank accounts and investments so they can limit their exposure to the falling euro stand to lose a lot of money, investment experts are warning.

These accounts and investments are being eyed up since ECB president Mario Draghi pressed the button to start printing money late last month. The euro has gone into free fall since and some believe it won't be long before it is on a par with the US dollar.

This isn't the first time that investors have run scared of the euro.

About four years ago, when there were concerns that the euro could collapse, many people poured their money into Swiss francs as the currency was considered a 'safe haven' at the time. There was also a lot of interest in sterling, US dollar and Swedish krona - and many opened savings accounts in those currencies to protect themselves against the vulnerable euro.

In the end, the euro never collapsed and many investors lost money when converting their money back into euro.

"People transferred their savings and wealth into many different currencies thinking this was the safe thing to do," says Peter Brown, founder of the Institute of Investing and Financial Trading in Dublin. "However, this was misguided and they were in fact taking on a risk - not protecting against one."

Irish people who live in the eurozone don't usually have any exposure to the falling euro - unless they have investments outside the eurozone or will be travelling outside Europe soon. It may make sense for you to hedge against the declining euro if you live outside Europe but own property in the eurozone. Otherwise, you could be in a losing game.

"Any move by a resident of the eurozone to take advantage of a fall in the euro would be taking on a new risk rather than hedging against one," says Mr Brown. "We would deem any such move as an investment and with all investments, the value can rise or fall."

Investing in currency can be risky because it can be very hard to predict how a currency will move.

"In the last couple of weeks the Swiss franc jumped over 20pc when the Swiss National Bank dropped a policy which capped the value of the Swiss franc versus the euro," says Vincent Digby, managing director of the financial advisers, Impartial. "This was despite saying that the cap was an integral part of their policy only days before. Several brokerage firms and hedge funds went bust due to their losses on the currency.

"This goes to show that with currencies there is a clear risk that the exchange rate can go against you, causing losses - as well as moving in your favour and generating profits. Some of the biggest companies in the world just hedge their currency exposures rather than trying to forecast or speculate on where exchange rates are going.

"If these large and well-informed companies decide that they have no edge or advantage in trying to speculate on currency movements, then individual investors need to have good reasons to seek out currency exchange risk."

It can also be expensive to invest in or speculate on a foreign currency because of the charges built into the exchange rate you get when converting from - and back into - euro.

"An investor is as likely to lose as to gain from exchange rate movements before costs - however, after costs it is a less than zero sum game and the chance of profiting from it falls to under 50pc," says Robert Lockie, investment manager with the British wealth managers, Bloomsbury Wealth. "There may also be taxes to pay if an investor bets correctly. Given that currency movements are not reliably predictable and have no expected return, while hedging carries a certain cost, possible tax liability and offers no consistent reduction in risk, is there really any point to it for a long-term investor?

"A long-term investor is generally better to ignore the impact of currency on their returns unless their circumstances are specifically sensitive to movements in exchange rates - such as being paid in one currency and incurring their expenditure in another."


All the same, with the euro expected to weaken further in the coming months, it could be a safe enough bet to assume that currencies such as the US dollar or British sterling will gain ground on it. So if you want to invest in a non-euro currency, despite the risks, how could you go about it?

Open a non-euro deposit account

Most mainstream Irish banks offer non-euro deposit accounts, as do many specialist banks such as Investec (see panel). "Interest in foreign currency deposits does tend to increase during times of eurozone uncertainty," said a spokesman for Investec.

You need to take tight control over the exchange rate the bank uses to convert your euro if you open such an account, according to Mr Brown. "If you know what you are doing, you can often insist on a price from the treasury division of the bank for this," says Mr Brown.

Choose a non-euro fund

You could also consider a fund which invests in non-euro denominational assets. "A British equity fund will have exposure to equities as well as the euro-to-sterling exchange rate," says Mr Digby. "So if you hold British equities and the euro weakens against sterling, then your British equity holdings are now worth more in euro terms."

The Artemis European Opportunities I Hedge fund is one fund which hedges against the falling euro which might be worth investing in, according to Jason Hollands of the British investment broker, Bestinvest.

Currency funds, where a fund manager decides what currency exposure to take on, could be worth considering if you want pure exposure to currencies. "One of the better-known funds is the Insight Currency Fund managed by Alder Capital in Dublin," says Mr Digby. "Over 10 years it has returned above 7.5pc per annum but there can be very significant volatility over short time frames.

"Another route is exchange traded funds (ETFs), where you can get exposure to a range of currency pairs. Avoid ETFs which are leveraged and can offer up to three times the exposure [to a currency] as this significantly increases the risk."

Buy a derivative

You could also put your money into a foreign exchange derivative - a financial instrument whose payoff depends on the foreign exchange rates of two or more currencies. "However, there is a cost to buying derivatives -and derivatives can be complex and hard for the non-professional to price accurately," says Mr Lockie. "So it may not be clear to an investor whether the price being offered represents good value or not."

The American economist and former US Federal Reserve boss Alan Greenspan, has described currency forecasting as little more than a coin toss.

Remember this before you bet on foreign exchange movements or pour your hard-earned savings into a non-euro bank account.

The ins and outs of sterling and dollar bank accounts

Where can I open a non-euro bank account?

You can open an account with AIB, Bank of Ireland, KBC, Permanent TSB and Ulster Bank - as well as Investec.

Apart from KBC, which only offers non-euro deposit accounts in British sterling, you can open an account in most of the major currencies. You may also be able to get an account in a smaller currency upon request.

With AIB, you can open an account in sterling; US, Canadian, Australian and New Zealand dollars; Swedish, Danish and Norwegian kroner; Swiss franc, Polish zloty, South African rand and Japanese yen. Ulster Bank also allows you to open an account in all of those currencies - along with Hong Kong and Singapore dollars, Hungarian Forints, Turkish Lira and Thai Bhat.

With Permanent TSB, you can open accounts in sterling; US, Canadian and Australian dollars and Swiss franc.

Investec offers 11 currency deposit accounts including sterling, Norwegian kroner, and US dollars.

Is the interest rate good?

The interest rate on non-euro deposit accounts is woeful.

The best rate you can expect from Permanent TSB, for example, is 1.2pc interest on its one-year fixed deposit sterling account - and you must save at least €50,000 to get that rate. Lodge €50,000 into its 30-day notice sterling account and you'll only earn 0.5pc interest.

Investec's 12-month fixed sterling deposit account pays 1pc interest and you'll only earn 0.5pc interest if you open its one-month notice sterling deposit account. Investec's 12-month fixed US dollar deposit account pays 0.6pc interest.

How do I open an account?

You will need to provide the same documentation (including proof of identity and address) when opening a non-euro bank account as you would any other bank account.

You may also have to open a standard current account with a bank to be able to open a non-euro deposit account there.

Most banks discourage you from opening an account for speculative reasons.

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