Quantifying currency gains

It is not news that the Euro has depreciated considerably against major currencies in the past year. For most Maltese, these currency movements have resulted in a significant impact on the way we consume and the way we invest.

During the past year the US Dollar has appreciated by over 21 percent against the Euro while the Pound has strengthened by 12 percent. These movements already have an impact on our daily decisions; importing a car from the UK into Malta is now 12 percent more expensive, as is ordering a book from Amazon. The opposite is also true; an English tourist will now find a holiday to Malta cheaper.

The above will reflect on our consumption patterns in the years to come, however, for the investment community the environment created by the decline in the Euro requires immediate attention.

Looking back at the last year and investor in a typical basket of European equities gained 15.9 percent. This is a remarkable achievement event during the best of times. In comparison, a basket of US equities would have appreciated by 11.6 percent in US Dollar terms. However, when the exchange rate is factored-in the US equity investor would now be making upwards of 30 percent in profit.

Similarly, an investor in the UK FTSE 100 would only have gained 5 percent over a one year period. However, when converted to euros, gains would jump to 17 percent.

These figures are so significant that they may easily have tipped the scale from a bad investment to a remarkable investment for a Euro denominated portfolio that was exposed to US or UK assets. Obviously portfolio’s consciously exposed to US and UK assets in the past year have performed best.

Investors should thus take a look at the way their portfolios are structured. If on purpose or by chance your portfolio is exposed to US dollars or Pounds Sterling, you should be aware that you have additional gains other than the dividend or the interest that you are receiving.

This leads to an interesting investment proposal, especially following Draghi’s warning not to bet against the Euro. Thus assuming that consensus forecasts are correct and that the Euro is unlikely to depreciate much further, holders of US bonds or equities should probably consider whether it is opportune to realize their currency gains.