Overseas investment esp. USA?

12tonelizzie

Overseas investment esp. USA?

DavidHayton

Whenever you invest your money beyond these shores you are exposing yourself to currency risk. If the pound suddenly appreciates by 20% then your investment (in terms of sterling) will go down by 20%. It is not relevent whether the security is priced in sterling or foreign currency, it is the value of the underlying asset that matters. It is of course possible to hedge against currency risk (some ETFs have this built in) but that costs money, and if the pound depreciates it will work against you.

Of course the flip side is that if you never invest any money overseas (or hedge everything that is invested overseas) then you are, in effect, gambling on the value of the future value of the pound.

I use TD Waterhouse to invest in overseas stocks. Their platform is flexible and allows me to hold foreign currency in the account.

When stocks are quoted on two markets, they may be the same thing, but you do need to check (caveat emptor). If they pay exactly the same dividend and provide exactly the same benefits then they should always be the same price (in terms of different currencies). If the prices diverge then arbitrage trades should rapidly bring them back together.

One significant plus about overseas trades is that there is no UK stamp duty to pay. However, there may be a foreign exchange spread imposed by your dealing platform. Again you would need to check.

Best wishes
David

jimjames

Yes it is what is called currency risk. As David has said changes in the currency will affect the value of your investment even if the investment itself is unchanged.

DavidHayton

12tonelizzie wrote: »

Do you think it would be a crude defence against £/$ fluctuations to hold 50% of my US investments in £ (chez H-L, Alliance T, iii) and 50% in $ (chez TDW)?

It shouldn't matter. Lets say you invest in a S&P500 tracker. The S&P500 then rises by 10% but the dollar falls against the pound by 10%

If you buy a dollar-denominated fund or ETF (e.g., through TD), the price of the fund will rise by 10% from, say $10 to $11. However, because the dollar has fallen by 10% you will be no better off in terms of sterling.

Alternatively you could have bought a sterling denominated fund such as HSBC American Index. The price in sterling would reflect both the change in the underlying asset (+10%) and the exchange rate (-10%), meaning that the (sterling price) would remain the same.

What you need to look for are the charges that are applied by each route. If you just want to access the S&P500 then it would be difficult to beat HSBC American index since the TER is very low, but you need to check this for yourself.

It is possible to buy funds that hedge the exchange rate, but this costs money (the counterparty needs to be paid).

David

DavidHayton

12tonelizzie wrote: »

Ah...

So essentially you only hold foreign-denomination assets when there's no other way to get hold of them?

Hi Lizzie.

I suppose so. All things being equal, I would go for a sterling denominated fund registered in London. But you may find the choice is limited (your point), or the UK-based fund is more expensive.

I opened the account with TD because I wanted to invest in Canadian stocks and ETFs; the only way to do that was to invest in Toronto. TD allow me to do this and, equally important, allow me to hold foreign currency in the account so that when I switch holdings I don't get stuffed with two foreign exchange fees.

Best wishes,
David

lvader

The interesting thing about investing in US funds is that the USD tends to fall when the stockmarket is doing well and rise when the stock markets are falling. This takes out some if the risk.

Having said that I'd be looking to put some money in Asian and European funds as well.

lvader

The currency stockmarket thing is mostly linked to US treasuries (government debt). When the stockmarket goes up US treasuries get sold and the US$ drops. When markets drop, people go back to the safety of US treasuries and the USD rises. You also need to take into the account the relative weakness of the pound, the USD dropped half a percent againt the pound but it dropped over 1 percent against the Euro. I'm not convinced the pound will appreciate greatly against the USD even if markets do well.

Although we have had a few false dawns already I think its time the large US tech stocks started to pick up again. Many of them are sitting close to 52 week lows. So far Intel, Apple and to a lesser extent IBM have been posting great earnings. These International players benefit greatly from a weaker USD as a lot of their earning come from abroad.

rockitup

It may be worth considering opening an account with TD Ameritrade in the USA if you plan on making a few trades or more.

They have a good trading platform (Command Centre 2.0) with Level 2 for free if you could deposit $25,000 minimum. If starting with less and not day trading just use their standard platform.

When I opened an account with them in 2008, the dealing charge was $9.95 per trade but as I trade quite often they agreed a rate of $5 per trade. I opened my account whilst on holiday there but I am sure their Wall Street office will open an account for overseas customers.

Definitely worth doing when the Pound is strong ($2.01 when I opened mine) as you can take additional profits when (if) the Pound eventually weakens. I am looking at transferring additional funds across shortly, the lack of a 0.5% stamp duty is quite attractive.

Interactive Brokers also have a UK telephone number now and they are also cheap for trading costs.