Buying in dollar shares...does the exchange rate matter

funnymonkey

Good morning
I am considering buying shares in google and was wondering if the ecchange rate matters at all

The way I see it you buy X amount of shares and they either go up or down and you then sell at whatever value that they are worth.
Have I got this right??

bowlhead99

Well if you buy them at (example number for easy maths) $1000 per share, and their assets and profits increase more than the market's current expectation, so that global investors all around the world are willing to pay $1200 per share in a few years' time due to Google's success, you would hope to be able to take that 20% profit.

However, if when you bought them the exchange rate was 1.38 dollars to the pound, you'll have paid £725 for the Google share. When you want to sell them at $1200, the exchange rate might be 1.66 dollars to the pound, and if it is, your $1200 Google share would only be worth £723, which is less than you paid.

So while the average US or global investor is crowing about their success from investing in hugely successful Google stock which went up by 20% in dollars as the company became more profitable than the market had expected and built its assets up, you would be frustrated because instead of growing the size of your investment, it appears to have shrunk and you have fewer pounds of value than when you started.

Of course, your wealth hasn't shrunk when measured in dollars, but you don't live your life in dollars and you need pounds sterling to pay your rent or mortgage or fund your retirement in the UK.

So yes, exchange rates have a huge impact on your returns from investing in overseas assets.

You might however take the view that you can't control the exchange rates any more than you can control what happens to Google's share price, and so the exchange rate will not change exceptionally over the long term as all the market's expectations of future exchange rate movements have already been considered in setting today's market rate. In that sense you could construct an argument to say it doesn't matter, don't worry about it.

But if you applied that same logic to Google shares, you would not buy Google shares anyway, because all the market's expectations of future profit levels, asset values and share price movements have already been considered in setting today's market price for Google. The return you get from it will only be the regular market return for all other stocks, adjusted up or down for company-specific risks.

The lesson seems to be, don't gamble on FX movements, and don't buy shares in individual companies unless you have price-sensitive insider knowledge that the wider market doesn't have.

But yes, exchange rates matter. A problem is that if you're buying shares in a particular company, at some point in the future you won't want that particular company and will want the cash back for yourself (or at least want the cash back to invest in other shares that might be denominated in a different currency). While currency rates may not matter over the long long term, they will probably matter at the specific point you want to exit your dollar shares.

dealer_wins

Now thats what you call a helpful and informative reply!!!

funnymonkey

All I can say is WOW...such an extensive, informative and educational reply.
Thank you so much
So very grateful

sixpence.

Bowlhead literally kills it, every time.

Plus

Yes... and no.

Consider, if you have a UK tracker you probably own a chunk of Shell.
Shell's shares are priced in pounds, but their income is mostly in dollars and the value of the company is linked to the oil price.

Let's say you sell the Shell shares and buy Exxon shares.

Both Shell and Exxon receive income in dollars, and their fortunes are very much tied to the price of oil, which is also in dollars.

Exxon's shares are denominated in dollars, while Shell's shares are in pounds. But that doesn't matter - what you own is an 'oil company', which is exposed both to the dollar and the price of oil. The actual currency the shares are denominated in doesn't matter - the Shell price will swing around in pounds terms to follow the dollar just like both will swing around to follow the price of oil.

So if you buy an asset whose value is linked to the dollar, you are exposed to exchange rate risk in sterling terms. But you don't change the risk by finding a similar asset denominated in pounds which is still exposed to the dollar. You would have to find a different asset whose value is linked to the price of sterling (let's say, UK property) to avoid that exposure.

GreenSnake

Plus wrote: »

Yes... and no.

Consider, if you have a UK tracker you probably own a chunk of Shell.
Shell's shares are priced in pounds, but their income is mostly in dollars and the value of the company is linked to the oil price.

Let's say you sell the Shell shares and buy Exxon shares.

Both Shell and Exxon receive income in dollars, and their fortunes are very much tied to the price of oil, which is also in dollars.

Exxon's shares are denominated in dollars, while Shell's shares are in pounds. But that doesn't matter - what you own is an 'oil company', which is exposed both to the dollar and the price of oil. The actual currency the shares are denominated in doesn't matter - the Shell price will swing around in pounds terms to follow the dollar just like both will swing around to follow the price of oil.

So if you buy an asset whose value is linked to the dollar, you are exposed to exchange rate risk in sterling terms. But you don't change the risk by finding a similar asset denominated in pounds which is still exposed to the dollar. You would have to find a different asset whose value is linked to the price of sterling (let's say, UK property) to avoid that exposure.

Jack Bogle of Vanguard uses this argument.
Most large company shares are now a hedge against falling Sterling.
Saved me against large losses during the Brexit result.

GreenSnake

In purely cash terms, yes you need USD to hedge against Sterling falls.
But in equities it's not such an issue.