Investing for your future is always tricky but expats have the extra challenge of juggling two currencies, often at the same time.
Earning money in one currency, while planning to retire in another, adds an unwelcome element of risk.
The task has become even more daunting since the financial crisis, when many currencies moved in sharp and unexpected directions. At one point this year, the world looked like it was on the brink of a currency war. Hostilities could resume at any moment. So how do you prevent your retirement plans from getting caught in the crossfire?
Before the financial crisis, a strong currency was a sign of national success. The British empire, US global hegemony and the German economic miracle were built on the might of the pound, dollar and mark.
Today, many countries see strength in weakness. A devalued currency makes exports cheaper, giving a boost to domestic demand, growth and jobs.
It makes for a strange kind of war, with countries such as the US, UK, China, Japan and others competing to scuttle their own currencies.
The problem is, every country cannot devalue at the same time. Currencies are priced relative to one another, so when one falls, another must rise. This only makes the battle more desperate.
The US and China have been fighting a low-key currency war for more than a decade, says Simon Derrick, currency expert at the global investment company BNY Mellon. “China has been buying vast reserves of dollars and other foreign currencies such as euros to suppress the value of its own currency, and make its exports cheaper. The US has responded with a policy of benign neglect towards the dollar.”
Since the financial crisis, other countries have entered the fray. “The Bank of England has constantly talked down the pound, and further debased it with £375 billion (Dh2.21 trillion) of quantitative easing (QE). New Japanese prime minister Shinzo Abe was elected on a platform of sinking the yen to refloat Japanese exports. Most euro-zone nations are crying out for a weaker currency, but unfortunately, the Germans won’t let them have it,” Derrick said.
The good news for UAE workers with dollar-pegged dirham earnings is that the greenback has been strong lately, Mr Derrick says. “Rising US industrial production, a stabilising housing market, improved retail sales, shale oil and gas discoveries as well as signs that the Federal Reserve might start tightening monetary conditions through QE tapering have all helped support the dollar this year. However, with global markets having remained surprisingly robust despite the series of crises that emerged this summer. The risk now is that the dollar could start to lose a little of its sheen as investors start to look for opportunities outside of the US.”
If you work in Dubai and plan to retire in the US, currency risk is less of a concern. But if you plan to retire elsewhere, you must pay much closer attention, says Jahangir Aka, head of SEI Investments, Middle East. “What really matters is your home bias. If you expect to retire in Florida, you should be collecting dollars. If you are set for London, it will be sterling. If it’s Paris, you want euros.”
Most ordinary investors have no desire to speculate on the currency markets, and rightly so, Mr Aka says. “But you should be alert to favourable exchange rate movements. If you are planning to retire in the UK, current exchange rates still make now a good time to send money home. Yes, the pound has risen recently, from $1.49 to nearly $1.60, but that is still a far more attractive rate than before the financial crisis, when it routinely traded at $2.”
Expats from other countries should also cash in on dollar strength, Mr Aka says. “Right now, the dollar looks strong against the South African rand, the Indian rupee, and many emerging market currencies.”
The biggest currency shock of recent months has been the collapse of the rupee. It has fallen nearly 20 per cent this year to an all-time low of 67 rupees against the dollar, although it has since recovered to 62 rupees. For many Indian expats, this has been a fantastic opportunity to send their dollars home at highly favourable rates, though some among them might also be concerned about investing in the Indian property market right now, given the economic and political uncertainty, with a general election due by mid-2014.
The currency war threatens investors with another deadly piece of fallout. Central bankers have two weapons at their disposal, QE-style asset purchases and rock-bottom interest rates, and both could fire up inflation.
The suspicion is that western central bankers are actively seeking higher inflation, because it would erode the size of their towering debts in real terms.
Inflation could pose a growing threat to every investor, Mr Aka says. “How do you counter it? By holding real assets, such as equities, property and commodities, rather than cash, which will only be devalued.”
Investing in property, say through a fixed-rate buy-to-let mortgage, makes sense. “The value of your property may rise, but the size of your mortgage won’t. If all goes well, you should end up with plenty of spare equity.”
Stocks and shares are another good hedge against inflation, Mr Aka says, but steer clear of bonds. “As inflation creeps up, interest rates will surely follow. And when they do, bond prices will fall.”
Gold is often seen as an inflation hedge, but Mr Aka is not impressed. “I don’t like gold. It has no value or use. At least silver and platinum have industrial uses. Gold is purely speculative, and the price has been falling lately.”
Even if we avoid an all-out currency war, investors should still brace themselves for plenty of volatility, says David Hughes, divisional manager at independent financial advisers PIC in Dubai. “For internationally mobile private investors, managing your currency exposure is more important than ever. A good way to bulletproof your retirement savings is to invest through a qualifying recognised overseas pension scheme (QROPS), which allow you to balance risk by holding assets in different currencies.”
As you approach retirement, you can steadily shift more of your pot into your home currency. “Financial planning isn’t just about chasing the highest possible return, but managing risk. Our foreign exchange services have grown substantially in recent years, as more people seek to reduce currency exposure,” Mr Hughes says.
You should consider spreading your savings between countries, and avoid exceeding the limits on local depositor protection schemes.
The fate of savers in Cyprus this year, some of whom lost up to 80 per cent of their savings above the euro-zone insured deposit limit of €100,000 (Dh496,500), shows the danger of leaving too much money in one country.
What happened in Cyprus used to be called theft, says Steve Gregory, managing partner at the financial services company Holborn Assets in Dubai. “Apparently, it has now been legalised. Can anyone trust the euro? In fact, can anyone trust any currency? I wouldn’t hold my cash in one account now, and I wouldn’t hold it in one currency either.”
Although your home currency should be the priority, Mr Gregory says your portfolio must contain a balanced mix of global investments, covering all major regions and markets, to avoid over-exposure to one currency.
For now, it seems like the world has stepped back from the brink of an all-out currency war, though the skirmishes continue. But for internationally mobile investors, avoiding currency risk is a lifelong battle.
The World by Numbers: global foreign-exchange turnover, a10