Euro Verus Non Euro Equities & Currency Risk

[taytoman]

I am just wondering is there any general view on what percentage of a core equity holding should be in euros, and what percentage should be in non-euros ? I am well aware of the need for diversification / not just be in the stressed eurozone, but on the other hand would like to minimise currency risk? Any views on a "conservative" approach to this- say 50% euro stocks and 50% others???

 

[Chris]

You need to look further than the currency location of the company. What is more important is where the revenue of a company comes from. An example is a UK telecommunications company traded on the LSE in sterling. Way more than 50% of its revenue comes from outside the UK.
As for the right approach, I don't think there really is an answer as it all depends on your risk tolerance. Personally I have 30% of my investments in gold, silver and mining stocks, less than 10% cash and the rest in equities. The equities are about 70% European companies with large exposure to Asia (at least 30% of revenue), and 30% Canadian oil and gas income stocks. I believe that this would be considered risky by many people, but based on my economic beliefs I see this as reducing risk.
Bottom line, look at where the revue comes from do work out the currency risk.

 

[Sunny]

You need to look further than the currency location of the company. What is more important is where the revenue of a company comes from. An example is a UK telecommunications company traded on the LSE in sterling. Way more than 50% of its revenue comes from outside the UK.
As for the right approach, I don't think there really is an answer as it all depends on your risk tolerance. Personally I have 30% of my investments in gold, silver and mining stocks, less than 10% cash and the rest in equities. The equities are about 70% European companies with large exposure to Asia (at least 30% of revenue), and 30% Canadian oil and gas income stocks. I believe that this would be considered risky by many people, but based on my economic beliefs I see this as reducing risk.
Bottom line, look at where the revue comes from do work out the currency risk.

Just don't assume the companies are taking on the currency risk. Many companies will hedge their exposure so even if most of the revenues come from Asia, it doesn't mean you are taking on Asian currency risk when you invest in the company. The are of course different schools of thought on this. Some argue that hedging is good for shareholders but others argue that companies shouldn't hedge because shareholders like Chris want the currency risk when they invest and should be left to hedge themselves if they so wish.

 

[Chris]

Just don't assume the companies are taking on the currency risk. Many companies will hedge their exposure so even if most of the revenues come from Asia, it doesn't mean you are taking on Asian currency risk when you invest in the company. The are of course different schools of thought on this. Some argue that hedging is good for shareholders but others argue that companies shouldn't hedge because shareholders like Chris want the currency risk when they invest and should be left to hedge themselves if they so wish.

Yes indeed, very important point I forgot to point out. I have found that annual and quarterly reports usually provide information on any currency or commodity hedging. On those occasions that it wasn't specifically mentioned I contacted the company's investor relations department.

 

[taytoman]

That is very insightful, and thank you for your responses. I am talking about index funds tracking S&P / Eurostoxx / FTSE etc, so there is no way I could establish where their revenues come from! I suppose I am asking what is the "conventional" / "cautious "wisdom on this - 50% Euro & 50% Non -Euro?????