Swiss franc, euro, US dollar… Which currency should you use to buy your shares?

Depending on your geographical location, your investor profile and your financial circumstances, you can therefore choose to invest in the stock market using your domestic currency or opt to use a foreign currency. Whatever your final decision, you should nevertheless be aware of the pros and cons of each approach!

Investing in your home currency

Investing in your own currency makes it easier, above all, to understand how your investment is performing. Unlike investments made in a foreign currency, an investment in your domestic currency does not expose you to exchange rate risk.

What’s more, investments made in your domestic currency and via domestic accounts are generally simpler to declare and manage than investments made in another currency area via a foreign provider, whose reporting may not necessarily be immediately usable for your tax return.

However, limiting one’s investments to the domestic currency restricts access to investment opportunities on the international stage… Whilst this may not necessarily pose any immediate problems when your country is enjoying sustained growth, it can quickly become an issue when real growth (adjusted for inflation) is stagnating.

Looking to international markets to access new investment opportunities and boost portfolio returns is therefore entirely appropriate and justified, particularly as there are other benefits to be gained from such a decision.

Investing in a foreign currency

There are generally three good reasons for investing in a foreign currency: the pursuit of returns, the search for stability, and the benefits of diversification.

Better performance

Growth rates are likely to vary significantly from one economic cycle to the next, both between emerging and developed economies and within these two broad groups themselves.

Investing abroad within a particularly dynamic and, on the face of it, promising currency area is therefore an excellent way to seek returns on an equity portfolio.

Nevertheless, this potential excess return must be analysed in light of the level of risk associated with the investment opportunities in question. Investing in an emerging market will, in most cases, expose you to higher economic risk in the event of a crisis, to political risk specific to the country in question, as well as to inflationary risk.

One need only look back at the currency crises experienced in the past by Argentina or Venezuela to be convinced of this, during which foreign investors saw their investments wiped out by hyperinflation and adverse movements in the foreign exchange market.

Greater stability

Whilst some investors seek higher returns, others are primarily looking for greater stability in their investments. Currencies such as the Swiss franc (CHF) are indeed regarded by investors as particularly safe.

In the event of an economic crisis or renewed tension in the financial markets, these currencies tend to act as a safe haven, offering investors a less volatile and less risky refuge.

Major currencies such as the euro, the US dollar, the yen and, once again, the Swiss franc are particularly popular among residents of emerging economies looking for a stable investment that can protect them from inflation.

To prevent massive capital outflows, the countries in question are likely to impose limits. In India, for example, the central bank has set an annual limit of $250,000 on overseas investment for each resident.

Greater resilience through diversification

Whether the aim is to seek higher returns or greater stability, investing in foreign currencies remains an excellent way to adjust the risk/return ratio of one’s investment portfolio. In this context, rather than choosing one particular currency over another, the key lies in diversifying one’s allocations effectively.

Since the publication of the Modern Portfolio Theory in 1952 by Harry Markowitz (who was awarded the Nobel Prize in Economics a few years later), diversification has played a central role in the world of asset management.

For an investor with sufficient financial resources, spreading investments across multiple currencies, geographical regions, asset classes, sectors and companies is therefore one of the best ways to optimise the risk/return profile.

However, there are a few technical and financial considerations to bear in mind before investing abroad!

When you invest in foreign currencies via a domestic investment platform, the brokerage commissions and currency conversion fees charged by your financial intermediary can sometimes be substantial…

One solution is therefore to open an account directly within the target currency area through a local investment platform in order to benefit from more favourable investment terms, and to use a foreign exchange specialist to convert and transfer your capital abroad.

Should I buy shares in euros or Swiss francs?

Making speculative predictions about the foreign exchange market remains an extremely risky business (even for professionals). Rather than trying to bet on whether a particular currency will rise or fall, it is therefore better to focus on other, more objective criteria when making a decision.

If you are targeting a specific company’s share, it is worth starting by identifying the stock exchange(s) on which it is listed, particularly with a view to comparing the liquidity conditions of the two markets (i.e. the trading volumes observed for the share in question). All other things being equal, it will indeed be more advantageous for you to choose the most liquid market.

Comparing interest rates between two currency zones is also good practice, as the interest rate differential has a direct impact on exchange rate movements over time. Some well-known trading strategies, such as the carry trade, are in fact based on this principle!

You should also be wary of historical returns observed across different stock market indices. On the one hand, past performance is no guarantee of future results. And on the other hand, the calculation methods used sometimes vary from one stock market index to another…

In France, for example, the CAC 40 reflects the performance of a basket of shares excluding reinvested dividends, whereas in the United States, the Dow Jones includes them; this could mislead you if your analysis is too superficial.

Finally, you should also pay close attention to the geographical exposure of your investment. The location where a company is listed does not necessarily correspond to the region in which it operates. The French stock market index, for example, generates 70% of its turnover abroad!

All things considered, each currency has its own advantages and disadvantages, so your thinking should focus on diversification in order to optimise your portfolio’s risk-return ratio, but also, and above all, to try to minimise your foreign exchange costs.