On June 22, 2016, one British pound was worth approximately $1.90 CDN. The next day, on June 23, 2016, British citizens voted to leave the European Union. The unexpected result of the Brexit vote has lead to a great deal of uncertainty. As we have underscored before, markets don’t like uncertainty. As a result, since the vote took place, the British pound has dropped to its lowest level in over 30 years; at the time of writing of this blog post, the pound closed at approximately $1.60 CDN.
How currency fluctuations can be positive
At Rempel Capital, we’re not currency traders, but we do take advantage of currency fluctuations when it’s beneficial to your portfolio. For example, a few years ago, when the Canadian dollar was at par with the US dollar, we purchased some US positions for our models. When the exchange between the two currencies returned to more traditional levels, it translated into a 30-35% gain on our original US investment.
In the case of the British pound, the exchange rate is now more in favour of the Canadian dollar. So yes, theoretically, if you purchased a British investment now, and months later the pound returned to its pre-Brexit value of $1.90 CDN, the gain would be approximately 18%.
How we manage the purchase
Once we’ve purchased an investment that’s in another currency (e.g. a US or British stock), we monitor it with the Canadian currency in mind. If the value of the other currency increases in relation to the Canadian dollar, we must evaluate whether it’s time to sell and take our gain. If the value of the other currency decreases further in relation to the Canadian dollar, we must evaluate whether to add to our initial investment.
The bottom line: any time the Canadian dollar is strong or at par with another country’s currency, that’s the time to consider investing in a company headquartered in that country.
This blog post was prepared solely by Herb and Andrew Rempel, who are registered representatives of HollisWealth® (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The views and opinions, including any recommendations, expressed in this blog post are those of Andrew Rempel alone and not those of HollisWealth.
® Registered trademark of The Bank of Nova Scotia, used under licence.