Buy Euros to hedge against no-deal Brexit GBP crash?

backgroundmom

Hi is anyone planning on investing in the EU (property etc.) / buying Euros to hedge against potential no-deal Brexit GBP crash? 

Malthusian

Betting that a) the UK will leave the EU without a deal and b) Sterling will fall further as a result is not hedging, it's forex gambling.

Hedging means reducing variability of outcome. A UK-based investor buying Euros to gamble on a fall in Sterling increases variability of outcome, because if they are wrong everything they buy in Sterling will be more expensive, plus they have lost their currency conversion fees.

By contrast if you had already decided to buy a house in the EU but your house purchase cash was currently in Sterling, buying euros now would be hedging as the eventual cost of the house would not depend on future currency fluctuations.

Betting that a roulette wheel lands on red is not hedging against the possibility that it lands on black or green.

backgroundmom

Malthusian said:

Betting that a) the UK will leave the EU without a deal and b) Sterling will fall further as a result is not hedging, it's forex gambling.

Hedging means reducing variability of outcome. A UK-based investor buying Euros to gamble on a fall in Sterling increases variability of outcome, because if they are wrong everything they buy in Sterling will be more expensive, plus they have lost their currency conversion fees.

By contrast if you had already decided to buy a house in the EU but your house purchase cash was currently in Sterling, buying euros now would be hedging as the eventual cost of the house would not depend on future currency fluctuations.

Betting that a roulette wheel lands on red is not hedging against the possibility that it lands on black or green.

Firstly, do you think there is any chance of a deal now?  Do you think the Government want a deal?  I guess your view on that determines whether or not it's a gamble or a hedge to buy euros.

Secondly, I have decided to buy a house in EU so fall into that category.

Linton

The best answer to the risk of a localised calamity is to ensure that your investments are broadly based globally so that problems in one country do not have major consequences for your wealth. You should not need to do anything specifically for a no deal BREXIT.

dunstonh

backgroundmom said:

Hi is anyone planning on investing in the EU (property etc.) / buying Euros to hedge against potential no-deal Brexit GBP crash? 

No. If Sterling falls, then global equities will rise in value (ignoring other reasons for price moves)  So, no need to hedge (or forex gamble)

Sailtheworld

dunstonh said:

backgroundmom said:

Hi is anyone planning on investing in the EU (property etc.) / buying Euros to hedge against potential no-deal Brexit GBP crash? 

No. If Sterling falls, then global equities will rise in value (ignoring other reasons for price moves)  So, no need to hedge (or forex gamble)

The problem with this solution is that exchange risk it mitigated but at the cost of market risk. We're talking about buying something with cash in the near future so you can't really ignore other reasons for price moves.

The only way to guarantee that next year's purchase will be done at today's exchange rate is to buy the Euros today.

Voyager2002

If you have decided to buy a house in 'Euroland' then it makes sense to keep the required funds in Euro.
More generally: I agree that a deal seems unlikely. The result will be an economic shock that will be damaging to the UK (although less so than Covid) and also, to a lesser extent, damaging to the EU economies. So I have already moved the bulk of my investments to China and related economies; to North America; and to carefully selected segments of the German economy that realy mainly on trade with China.

Linton

backgroundmom said:

....I guess your view on that determines whether or not it's a gamble or a hedge to buy euros.

Secondly, I have decided to buy a house in EU so fall into that category.

Pity you did not mention your decision to buy a house in the EU right at the start.  That radically changes the appropriate advice. If you are happy with the exchange rate now and intend to buy this house in the next year or so then buy the currency you need now (I assume Euros).  You may win or you may lose, but at least the risk will be removed.

2unlimited91

But have you decided to buy the house purely as part of this plan to protect yourself a no-deal brexit, or for a completely different reason?

A different reason could include:

- as a second home, because you frequently spend time in some country, and would like permanent home there, and you have considered all the financial, legal, linguistic, etc, complications this may involve; or

- as an investment, because you've decided that a house in a specific location in a specific country offers the best risk vs reward prospects, compared to any other kind of property in any other location, or to any direct or indirect investment in shares

But if the reason is purely as part of your plan to dodge fallout from a bad brexit, then it makes less sense. Consider investing in global equities instead.

Albermarle

More generally: I agree that a deal seems unlikely

An agreement on all the major issued by Dec 31st is very unlikely , however there are alternatives to a no deal.

Including doing half a deal , with the rest left open. Or another set of delays.  Covid 19 is a good excuse for that.

So personally I would not want to bet on Sterlings future direction .

backgroundmom

Thanks for all your advice, it's very helpful.  In answer to your question about buying a house in Euroland, it would be as retirement home/second home and because I want to live in that country, not a financial decision.