Foreign currency actions and currency risk (2/4)

In our previous article we've seen how dangerous it can be to rush headlong into apparent bargains on foreign markets. It's true that our portfolio gives pride of place to US titles because the best payers of growing dividends are currently located across the Atlantic. However, certain precautions must be taken with these values because investing in a third-party currency can prove risky in the long term. Fortunately, there are several methods that can limit this risk. We will see that the most obvious are not necessarily the best.

The first reflex is to say that, in order to limit currency risk, we're going to keep a limited proportion of foreign-currency assets in the portfolio. You don't need a PhD in economics to understand this. However, this raises another problem: which local-currency investment should we turn to?

One solution is to hold on to cash. It pays off in the short term, as you keep a bit of money aside to buy securities that will be sold off at some point on the market. But in the long term, the value of cash is eroded by rising prices.

The other option is to buy bonds in the local currency. A good point which, while lowering currency risk, also makes it possible to diversify types of investment. But the problem is that in recent months, everyone has had the same idea at the same time, selling equities to buy fixed-income bonds. Bond yields are just miserable at the moment (10-year Swiss Confederation = 0.77%), not to mention the risk of price rises that could be added to them.

But then, it's not that complicated, just buy shares in local currency. That's true. But we shouldn't forget, whether we like it or not, that we live in a globalized world, that borders are real sieves and that most companies listed on the stock exchange generate a significant proportion of their sales abroad. And this is all the more true for a small country like Switzerland. This means that a strong franc/weak dollar is bad for exports, and that the results of foreign branches, converted into CHF, look a bit peanuts.

OK. Well, so we invest in small local companies that don't export! Good idea. But who do they work for? For the larger companies that do export. Six of one and half a dozen of the other. Yes, but there will be companies that only work locally, for purely local clients... ah... that's already better, indeed, we have, for example, certain companies in the food sector that produce for domestic clients and can even benefit from a strong local currency to buy abroad. Even if they include a small export component, Bell And Emmi possess these characteristics.

However, even if you can protect yourself in part against currency risk in this way, it's impossible to avoid it altogether. Apparently, the companies mentioned above are not directly affected by a fall in the dollar against the Swiss franc. However, if the franc is too strong over the long term, as is currently the case, this will lead to redundancies in exporting companies, and therefore also among their local suppliers, and thus to higher unemployment in Switzerland, accompanied by a recession and a drop in domestic consumption. It's less violent and less immediate than for the big exporters, but the effect is there nonetheless.

What's more, this method considerably restricts the choice of companies in which to invest. This solution must therefore be combined with other strategies, which we will discuss in our next chapters. upcoming articles.