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Investing Overseas For High Returns? Here Is How Currency Exchange Rates Impacts Your Actual Returns

For Singapore investors, attractive returns of overseas markets may not look that rosy once you factor in foreign currency exchange.


For many, the prospect of investing overseas may seem more lucrative than putting money into the local stock market. This is because many major stock indexes around the world, including the US, UK, Germany, Hong Kong and even neighbouring Malaysia, are trading near historic highs, having breached the previous highs in 2007, right before the Global Financial Crisis.

Read Also: The Joseph Cycle: Will The Stock Market Crash After 2022?

This is compared to Singapore’s Straits Times Index (STI), which hasn’t yet broken its highs during mid-2007. In fact, the STI is still trading nearly 8% below its historic high in October 2007.

Performance Of Major Country Indexes Globally

We take a look at how some major country indexes have performed since the last Global Financial Crisis hit at the end of 2007. The Global Financial Crisis routed virtually every stock globally and even brought major multinational companies to their knees.

The advantage of investing in country indexes is that our investment portfolio will automatically comprise the strongest blue-chip stocks listed in the country. This means that the country index will likely persevere, and recover once the global economy improves.

Read Also: Is Your Investment Portfolio Built To Withstand The Next Financial Crisis?

As we can see, the only country index that hasn’t breached its highs since October 2007 is the STI. All other country indexes we listed below improved, albeit by varying degrees. The US’ Standard & Poor’s 500 (S&P 500) improved the most, at 74%, and Hong Kong’s Hang Seng Index (HSI) gained 7% at the bottom end of the spectrum.

Read Also: 3 Stocks That Are Stronger Today Than Before the 2008 Great Financial Crisis

Index Country Oct 2007 Apr 2018 Difference
1 Straits Times Index (STI) Singapore 3,772 3,573 -6%
2 Standard and Poor’s 500 (S&P 500) US 1,535 2,670 74%
3 Financial Times Stock Exchange 100 (FTSE 100) United Kingdom 6,661 7,368 11%
4 DAX Germany 7,949 12,541 58%
5 Hang Seng Index (HSI) Hong Kong 29,465 30,418 7%
6 Nikkei 225 Japan 16,738 22,162 33%
7 FTSE Bursa Malaysia KLCI Malaysia 1,414 1,888 34%

* Information from Yahoo Finance

Performance of Major Country Indexes In The Past 20 Years (Since 1998)

In the earlier table, we saw a damning depiction of how the STI remained a laggard while major indexes across the rest of the world hurtled towards record highs.

In the table below, we examine how the country indexes have performed in the past 20 years. We cannot just take the past 10 years and jump to the conclusion that investing overseas would have been the better choice to grow our money.

Index Country Apr 1998 Apr 2008 Apr 2018 Gain Since Apr 1998
1 Straits Times Index (STI) Singapore 1,493 3,236 3,573 140%
2 Standard and Poor’s 500 (S&P 500) US 1,121 1,413 2,670 139%
3 Financial Times Stock Exchange 100 (FTSE 100) United Kingdom 5,864 6,091 7,368 26%
4 DAX Germany 5,144 7,043 12,541 144%
5 Hang Seng Index (HSI) Hong Kong 11,001 25,517 30,418 177%
6 Nikkei 225 Japan 15,641 13,850 22,162 42%
7 FTSE Bursa Malaysia KLCI Malaysia 626 1,272 1,888 202%

* Information from Yahoo Finance

Read Also: 10 Biggest Stock Exchanges In The World: Here’s How Much They’ve Gained In 2017

Here, we see that the performance of the STI in the past 20 years has not lagged that much. In fact, it’s beaten US’ S&P 500, UK’s FTSE 100 and Japan’s Nikkei 225.

We Haven’t Even Taken Forex Into Consideration

As we all know, the Singapore Dollar has been one of the strongest performing currencies in the world. This is also a major risk we take when investing overseas, because a stronger Singapore Dollar, will mean a poorer investment return from your overseas investment.

Let’s see exactly how this would have impacted our foreign investments if we had parked our money outside Singapore for the past 20 years.

Index Country Exchange Rate In 1998 Exchange Rate In 2018 Forex Gain
1 Straits Times Index (STI) Singapore
2 Standard and Poor’s 500 (S&P 500) US 1.5835 SGD to 1 USD 1.3163 SGD to 1 USD 17%
3 Financial Times Stock Exchange 100 (FTSE 100) United Kingdom 2.6460 SGD to 1 GBP 1.8430 SGD to 1 GBP 8%
4 DAX Germany 1.9580^ SGD to 1 EUR 1.6171 SGD to 1 EUR 18%
5 Hang Seng Index (HSI) Hong Kong 4.8933 HKD to 1 SGD 5.9607 HKD to 1 SGD 22%
6 Nikkei 225 Japan 83.85 JPY to 1 SGD 81.82 JPY to 1 SGD -3%
7 FTSE Bursa Malaysia KLCI Malaysia 2.3571 MYR to 1 SGD 2.9617 MYR to 1 SGD 26%

* Information from Investing.com

^ Euro was adopted in 1999

As seen in the table, the Singapore Dollar gained against most currencies in the past 20-year period. If we took into consideration the currency adjustments in the markets when calculating our investment returns, the STI would fare much better.

 

Index Country Apr 1998 Apr 2018 Gain Since Apr 1998 Gain Since Apr 1998 (With Forex adjustments)
1 Straits Times Index (STI) Singapore 1,493 3,573 140% 140%
2 Standard and Poor’s 500 (S&P 500) US 1,121 2,670 139% 116%
3 Financial Times Stock Exchange 100 (FTSE 100) United Kingdom 5,864 7,368 26% 24%
4 DAX Germany 5,144 12,541 144% 127%
5 Hang Seng Index (HSI) Hong Kong 11,001 30,418 177% 139%
6 Nikkei 225 Japan 15,641 22,162 42% 44%
7 FTSE Bursa Malaysia KLCI Malaysia 626 1,888 202% 150%

* Information from Yahoo Finance and Investing.com

As we can see, once we take forex into consideration, the STI actually beat out majority of the indexes over the past 20 years. In fact, the only index that beat the STI was Malaysia’s FTSE Bursa Malaysia KLCI, which gained 150% compared to the STI’s 140%.

Forex Is Only One Risk Area To Consider – There Are Many Others

As seen, the STI hasn’t performed too badly. In fact, we can even say it has performed very well when compared to its global peers. These calculations don’t even take dividends into consideration, and the STI is known as an exchange with companies that pay some of the highest dividend in the world.

Read Also: How To Diversify Your Investment Portfolio Outside Of Singapore

Yet, we can also say that forex is only one of the risk we face when investing overseas. There are many more risks that we may be taking when we invest overseas that we do not even take into consideration. These may include country risk, liquidity risk, higher transaction costs and several others.


 
 

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