British investors abroad are doing remarkably well with Brexit. These are the findings of Natixis Global Asset Management’s annual global portfolios barometer, which found that UK portfolios with significant non-pound assets posted an average performance of over 13%.
This far exceeded even US investors, who ranked second globally with average returns of 8.2 percent.
Interestingly, however, much of this success is due to currency risk, with currency-linked returns exceeding the underlying stock markets.
Matthew Riley, head of research in the portfolio research and advisory group, says: âA significant part of the explanation is currency risk, which is not surprising since currency movements in 2016 have were the highest since 2008 and had a significant impact on the portfolios studied.
For example, he says, a UK investor with unhedged US equity exposure (in other words, without making any offsetting investments to counter the risk) would have earned an additional 19% return in 2016 due to the depreciation of the pound sterling against the dollar.
âFor Eurozone equities it would have been around 16% and for Japanese equities it would have been 23%. The impact of currencies has also been seen in allocation funds, emerging market debt and high yield debt funds, which are often not hedged by advisers. . “
He adds, âFor equities, those currency-linked returns were higher than the returns of the underlying equity markets. In fact, adding up the full impact of currencies, we find that around 7% of the contribution to the performance of UK advisor portfolios, or 50% of total returns in 2016, came from currency risk. “
One thing is clear, there is money to be made by trading currencies. But for new entrants to the market, they are faced with a bewildering array of options, platforms, and terminology, so here’s a rundown.
Many people. Foreign exchange is more commonly known as Forex, and Forex is the most traded market in the world. According to CityIndex, there is an average turnover of over US $ 5.3 trillion every day. It’s 4.24 trillion pounds at the time of writing, although, as we’ll see, that may change.
There are many different people doing business, from large corporations to part-time traders operating from their rooms, which has only become possible with the proliferation of the internet.
What drives currency movements?
Most people already know that currency values ââchange, which is why exchange rates change. And the changes in those rates are determined by a multitude of traders buying currencies along with other currencies and making judgments about what each is worth against each other.
Prices can change at an incredible rate in response to world news and events. Traders examine key factors including political and economic stability, currency intervention, monetary policy, and major events such as natural disasters.
How it works?
When you trade Forex, currencies are presented in pairs, for example, British Pound / US Dollar. The trader predicts the evolution of the exchange rate between the two currencies. So, if the trader thinks that the US dollar is going to strengthen against the British pound, they are buying dollars, which means they are giving up their sterling as well.
If they are right, the value of their currency increases and they can sell at a profit. If their intuition was wrong, then they lose.
For example, the GBP / USD rate indicates the number of dollars a book can buy. If a trader thinks the pound is going to increase in value against the dollar, he uses dollars to buy books. If the exchange rate rises, they can resell the pounds at a profit.
One of the reasons Forex trading is so popular with amateur investors is that the markets are open roughly 24 hours a day, depending on the time zones of different countries.
Will I make money?
Forex is risky. It’s so risky that many commentators have compared home traders to professional players, arguing that the idea that an individual can reliably predict currency movements is nonsense.
There is an abundance of investment platforms, guides, books, and tutorials that suggest that it is possible to earn a small fortune by trading currencies. However, spend your time reading the forums and there are hordes of Forex traders losing money day in and day out.
It can be very expensive to trade in currencies and individual traders usually don’t have a pot big enough to make anything other than small wins.
It is essential that future traders do not invest money that they cannot afford to lose.
After that ?
This overview of currency trading is not enough to equip a potential investor with everything he needs to know to have any chance of realizing a real return. It is a complex field and one which, even with extensive reading and knowledge, is fraught with risk.
There are stock brokers and financial advisers available to discuss standard investments and degrees of risk, but for people who trade Forex, this is largely self-taught and full of risk.
Before embarking on any type of online trading, it is a good idea to spend some time reading more and talking to other investors. Just be aware that any book, tutorial, or guide that promises big returns isn’t entirely honest about the level of risk involved.
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