If you take the accompanying table too much to heart you will only invest in euro-denominated securities.
The euro makes up some 70 per cent of the Maltese lira basket and it carried the lira with it. As one would expect, the greatest variations would come versus those currencies which are accorded less importance, the pound sterling, at 20 per cent, and especially the US dollar, at approximately 10 per cent.
The table below shows why most investors gravitate towards building a domestic portfolio. A bad currency can ruin the best invested portfolio while the currency you are predominantly in fluctuates but little and is thus "safe". A misconception, true, but a comfortable one.
For donkey's years, institutions invested in their home currency in home assets. If you have huge liabilities against the assets you are managing, such as the case with pension funds, they pay you more for prudence than valour. If you are managing an entity's equity you might be a little more adventurous but would still like to report a surplus, to yourself or your boss, in the currency in which (notionally) money is usually spent.
In the last 20 years or so, as communications improved, as the same or similar standards (including accounting) found application internationally, and as investors came under increasing pressure to derive meaningful returns wherever they could find them, investment managers started to adopt more of an international perspective and started to acquire international holdings albeit many portfolios still carry heavy domestic slants.
The domestic bias is not just the result of seeking safety from currency fluctuation but also comes from investors being more knowledgeable about local rather than international companies and their management. A local investor is more likely to sense nuances and to form a more accurate idea of the impact on local companies of news.
On the other hand, investment returns can often be sanitised via hedging. Today, with the developments in derivatives, hedging is more effective and not costly. Furthermore, futures can be used to swap expected cash flow streams into others.
But for unhedged portfolios, currency fluctuations can seriously enhance or dent returns.
During 2004, for example, large companies, in both Europe and the US, returned around nine per cent. If currency movements are overlaid, Europe would remain at nine per cent but a similar investment in the US would have returned a net six per cent.
Shares in big companies in the UK, in contrast, had returns of some eight per cent but this was enhanced to 10 per cent by the sterling's appreciation of nearly two per cent.
Sterling's appreciation came about because its assets, including bonds, had higher yields than those in the euro, US dollar or yen, the economy is perceived to be to some extent "independent" of Europe's economic lethargy and more flexible.
Today, these factors are extant as is the suspicion that the US, really, is relying on a falling dollar as a way out of its "twin deficits" problem and that it views the falling dollar as not so much a problem for the US as for others who are holding the dollar.
The downtrend has now been halted due to the tax incentives given to companies to repatriate funds to the US and the expectation of higher interest rates.
There has been a switch of holdings, including central bank reserves, to the euro but many international investors look askance at the euro primarily because it is not really the currency of one nation, the Stability Pact seems to be unstable, and Europe is not delivering growth, primarily because of its inflexibility. Broadly speaking, Europe takes its cue from social priorities while North America follows economic prerogatives.
The price of gold is always interesting. In lira terms it finished January 2005 where it was at the start of 2004 and is now at around $420. But this fact masks considerable fluctuations since the price these 13 months touched $454 in December and $375 in mid-May. Gold is being largely driven by the dollar, but in the opposite direction.
pva@onvol.net
Mr Azzopardi is managing director of Azzopardi Investment Management Limited (www.azzopardi.com) which is licensed by the MFSA to provide investment services, including stockbroking. The company is involved in acting as sponsoring and corporate stockbroker for various listed companies.
This article is only meant to provide information, which the writer believes to be accurate at the time of writing, and is not intended to give investment advice and its contents should not be construed as such.
The value of securities, and the currencies in which they are denominated, may go down as well as up. Readers are requested to seek professional financial advice tailored to their own personal circumstances.