investing in Uk shares

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pajmcder

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hi
i am planning to invest in a number of UK Blue Chip Shares that have the prospect of delivering good returns in the coming years and that pay good
dividends , i plan to hold these shares for the long term 10-20 years and to reinvest the Dividends , all going well.

However i am unsure about the exchange rate, if i buy uk shares now with an online broker am i at a disadvantage with the current exchange rate between the euro and sterling ? Do i lose up to 20% of my investment at the start because of this difference.
 
Well not unless the exchange rate changes dramatically on the date you make the purchase, no. But that said, if you invest in shares traded in a foreign currency, then the overall performance of your investment will be impacted by prevailing exchange rates. And of course, if the company itself is a major international player then it's performance will also be impacted by the exchange rates.

The other thing to think about is the dividend income, will it be paid into a Sterling account or a Euro account? As this will also be impacted by exchange rates and commissions if paid into a Euro account...

Why invest in Sterling at all?
 
The exchange rate is almost irrelevant. Consider a Blue Chip share which is trading in London at £1. It is probably also trading in Paris at €1.25, in New York at $1.6, in Tokyo at Y130. This does not mean that it is cheapest in London and 130 times dearer in Tokyo.

However, exchange of currency does involve charges, maybe as high as 1%. If you are trading in a reasonable quantity, say, £50k make sure you ask your bank for best rate, maybe even shop around.
 
Two very important considerations here are of course diversification. The recent history of BP and the Banks should confirm that there is no such thing as "blue chip"

How many shares do you need to be diversified?

http://www.askaboutmoney.com/showthread.php?t=169703

The second is tax. Remember that dividends are subject to marginal rates of tax and USC giving a marginal rate of tax of up to 55%. Compared to a distributing fund with a tax rate of 30%.

http://www.sensibleinvesting.tv/
 
Duke of Marmalade said:
are trading in a reasonable quantity, say, £50k make sure you ask your bank for best rate,
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Find and use a stockbroker for the currency exchange. Banks charge huge rates for dealing in shares, so check around and search the market for what what is available in the market.

Banks need to stick to what they know best. If they had of, the world finances would not have been in such a state.
 
pajmcder said:
hi
i am planning to invest in a number of UK Blue Chip Shares that have the prospect of delivering good returns in the coming years and that pay good
dividends , i plan to hold these shares for the long term 10-20 years and to reinvest the Dividends , all going well.

However i am unsure about the exchange rate, if i buy uk shares now with an online broker am i at a disadvantage with the current exchange rate between the euro and sterling ? Do i lose up to 20% of my investment at the start because of this difference.
Click to expand...

The currency a share is traded in is not your sole concern. Take Colgate, the US consumer company as an example. Its shares are quoted in dollars - do you therefore have dollar risk as a Euro-based investor? Some 80% of Colgate's earnings are earned outside the US, and if the dollar weakens these earnings become more valuable in US dollar terms. Hence, this positive impact will go some way to offsetting the negative of a weakening dollar. To keep it simple, the real exchange rate exposure you have is the underlying earnings of the companies you own.

Hence, investing in a spread of FTSE 100 shares may well give you a spread of earnings in different currencies. So undersanding the exact currency risk you have is not at all easy. Of course, you don't avoid currency risk by staying in Euro denominated shares, say, in Ireland. Many Irish stocks have overseas earnings which is a currency risk even though their shares are traded in Euros.

The earlier comment on the taxation of dividends is relevant and you should note that the income on high yielding funds quoted on the stock exchanges is taxed at a more favourable rate than dividends from individual companies, so funds with high yields are an option for you.

Rory Gillen
 
mercman said:
Find and use a stockbroker for the currency exchange. Banks charge huge rates for dealing in shares, so check around and search the market for what what is available in the market.

Banks need to stick to what they know best. If they had of, the world finances would not have been in such a state.
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You miss my point. I have used TD Direct Investing. An excellent trading platform allowing one to trade shares in a choice of currencies. Unfortunately they cite a spread of up to 2% each way if you trade in a currency which is not your base currency. If you go to a bank you can negotiate an exchange spread at a fraction of that, but of course buy your shares on the trading platform - not sure banks even sell shares.
 
PMU said:
I disagree. The exchange rate is extremely important. For an EUR investor, your return on a share priced in GBP is the return (+ or -) on the price of the share plus the return (+ or -) on the EUR /GBP exchange rate. See this thread FX costs of investing in sterling shares http://www.askaboutmoney.com/showthread.php?t=156634
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The exchange rate per se is irrelevant. Across the Border you will find shops which will accept both € and £ so that a teddy bear for christmas might be priced at £40/€50 . Which one you care to chose does not matter, you get a teddy bear, not a sterling teddy bear or a euro teddy bear. Rory Gillen explains the situation well. A share is an investment in the underlying earnings of the company which may themselves have a currency angle but that has nothing whatsoever to do with the choice of currency for quoting the share price.
 
The mods may wish to move this to the Great Financial Debates, or perhaps a separate thread on currency risks, but I’m still not happy with post #9
Duke of Marmalade said:
The exchange rate per se is irrelevant. A share is an investment in the underlying earnings of the company which may themselves have a currency angle but that has nothing whatsoever to do with the choice of currency for quoting the share price.
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If you buy anything, be that a share or a teddy bear in a currency other than your own and intend to sell it on, you are exposed to currency risk, i.e. the risk that the exchange rate between your own currency and the currency in which the share or teddy bear is priced will change by the time you wish to sell.
For example, if you bought a share or teddy bear for 1 GBP on 1 Nov 2011 and sold it on a year later on 1 Nov 2012 for 1 GBP you would have made neither a profit or a loss (before taxes and charges) if you were a GBP investor, i.e. if all your transactions took place in GBP.
If you were an EUR investor, it would cost you 1.16 EUR (i.e. 1 GBP at the EUR/GBP exchange rate of 0.8619 on 1/11/11); and if you sold it for 1 GBP on 1/11/12 you would receive 1.25 EUR (as the EUR/GBP exchange rate on 1/11/12 was 0.8016), i.e you gained (before taxes and charges) due to the movement in exchange rates.
Of course, the exchange rates could have gone the other way and your % profit in EUR would be lower than that of a GBP investor.
If you buy assets denominated in a foreign currency you are taking on foreign currency risk, i.e. if the value of the foreign currency falls against the EUR the value of any shares denominated in that currency also fall in EUR terms; if the EUR weakens against the foreign currency the value of any shares denominated in that currency increase in EUR terms. http://internationalinvest.about.com/od/gettingstarted/a/currencyeffect.htm
 
If currencies follow a random walk then all that is going on here is the volatility will go up.
The annualized volatility of a basket of currencies is in the order of 10 whereas equities would be of the order of 20. So the equity volatility is going to dominate.

Therefore in an equity portfolio foreign currency risk will increase volatility but will not change the expected return. The price of microsoft today is the same in euros as it is in US$. After the fact you might find out that the USA did better than Europe over the recent past but you would not expect a different expected return before the fact. The expected return of all developed economies is the same we only find out after the fact the relative positions.
If you don't want or like the extra uncertainty from currency risk you can buy a currency hedged fund.

Ishares have an MSCI World Etf euro hedged I think for about .55%pa.
 
PMU said:
If you buy anything, be that a share or a teddy bear in a currency other than your own and intend to sell it on, you are exposed to currency risk, i.e. the risk that the exchange rate between your own currency and the currency in which the share or teddy bear is priced will change by the time you wish to sell.
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The teddy bear does not carry any currency risk. Now if you go into that shop in Newry with £40 and €50 in your pocket, you have a choice. That choice is indeed a currency bet. However, I am presuming that OP does not have the choice between parting with £ or €, she only has €. It does not matter (except for FX transaction costs) whether she buys the Blue Chip Share straight with € or whether she converts her € to £ and then buys the share with £. I think PMU that we are getting a little too theoretical for OP. OP thought she was losing 20% straight off because she had to buy sterling to fund her share purchase. I presume you accept that she has got that wrong.
 
@ Marc

What OP is talking about is the currency used for the share purchase. That does not in any way impact the volatility of the share price. Rory Gillen has explained that a share's performance may depend on the performance of various geographical footprints but that has nothing whatsoever to do with the currency used to fund the purchase.

I fundamentally disagree with currency hedging of stock portfolios. Like you, though possibly not so fanatical, I think diversification is a good thing and, up to a point, so to is geographical diversification. If I invest in US shares I am investing largely in the US economy. The performance of that economy will in part be transmitted in the strength or otherwise of the $. If I hedge that part of the performance which is transmitted through the exchange rate I really don't know what I have invested in, certainly not a full investment in the US economy.
 
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