Every day it seems there is news that rocks the foreign exchange markets one way or another. On Monday, news about the UK’s borrowing sends Sterling down. On Tuesday, it’s the Euro’s turn as the Greek crisis takes a new twist. Meanwhile the Dollar is up on good economic data – or down on worries about debt.
For people living and working in one country, these issues can seem rather distant, only having an indirect impact on daily life, and perhaps the choice of a foreign holiday. For expatriates, on the other hand, these fluctuations can have a dramatic and instant effect on one’s ability to keep one’s head above the water line financially.
As Kentingtons advises expatriates in France, we will concentrate on the immediate issues in France, although the same applies to a large extent in the entire Eurozone, and partially to any expatriate.
Firstly, it is instructive to try and understand what is going on – why are currencies so volatile right now? The basic issue underlying all this is clearly the economic crisis or “credit crunch”. In times of difficulty, the markets look for “safe” places to put money – traditionally this would have been large mature economies like the US and Europe.
The unique character of this crisis is that it is just such places bearing the brunt of the crisis – meaning nobody can decide what is “safe”. For a while the Euro qualified, due to the sheer size of the Eurozone, but now the stability of the Euro is in question. The US has lost some of its traditional “safe haven” status, due to large and growing deficits. Meanwhile, emerging economies like China – normally the places that money would exit fast in bad times – are actually in good shape, and are looking in some respects “safer” than the West.
The net result is that money flows around based on the latest snippet of news, and currencies move up and down seemingly at random.
The more practical question is then – what to do? Should I move money from Sterling to Euros – or the other way? Should I put my plans to move to France on hold – or move before the rate goes down? Often the reaction to such turbulence is to just give up and wait for clarity. However, we would suggest that difficult times are when a solid financial plan is most needed.
As our job is to help expatriates, we’d love to be able to tell you where the Euro-Sterling rate will be in six months time. Unfortunately, we can’t – and of course, no one can. Even the most well informed analyst cannot predict exchange rate movements given the current climate.
What we can do, and do all the time for our clients, is to help them create a Financial Plan that works for them, and that minimises the effect of this turbulence.
Here are some of the key issues we propose you try and think about:
How much money do I actually spend each month/year?
It may be tempting to wait “until things get better” to move money, or move country even, but that could be a long wait (we only live once!). Perhaps a better approach is to see what you need to achieve the lifestyle you want, and see if that is attainable in the current climate. In general, it would be wise to assume exchange rates are as likely to get worse as get better. In doing this, it is important to fully understand the impact of taxation on any changes you wish to make.
Where do I spend my money?
If you spend say four months of the year in the UK, and eight in France (and spend equally in both places), then it would make sense to have a third of your wealth/income in Sterling, and two thirds in Euros. This way, the effect of exchange rate movements will be minimal on your spending power. In such a scenario, for example, a fixed sterling income such a pension might be balanced by making a Euro-denominated investment of spare capital.
Are my investments tax-efficient for my country of residence?
It is important that any investments are optimised for your country of fiscal residence. Note this does not contradict the point above – it is perfectly possible to have Sterling investments in a French tax efficient structure. Conversely, UK tax efficient investments (e.g. PEPs or ISAs) won’t work if you are a French resident. If you are in any doubt as to where you are resident, then you should contact us for advice.
Is my Mortgage right for me?
It is tempting to take out a mortgage purely based on who is giving the best interest rate on day one. However if you are buying across borders, it is important to consider what effect future exchange rate movements could have on your ability to pay. If you are paying a mortgage denominated in one currency from an investment denominated in another, you could be very seriously exposed – both from currency movements and divergent interest rate movements.
What level of risk am I comfortable with?
It is nearly impossible to eliminate all risk in life. However some strategies are riskier than others. Currencies can be extremely volatile, and any investment approach should take this into account. For example, if you were living in France, and thus spending in Euros, and were invested in UK Government Bonds (a theoretically “safe” asset class), your investment would have been extremely volatile over the last two years – mainly due to exchange rate fluctuations. Therefore managing the risk profile of an expatriate’s investments requires not only looking how risky an asset is (cash, bonds, shares), but at the currency aspect too.
Clearly we can only talk in general terms here – each person’s situation is different. If you would like further advice we would be pleased to discuss your personal situation with you.