Currency & Geopolitical Risk

Investing internationally means taking on two layers of risk: the performance of the underlying asset, and the movement of the currency you're holding it in. A US stock that rises 10% can deliver 5% or 15% to a UK investor depending on whether the pound strengthens or weakens against the dollar. Currency risk is often larger than most investors realise — and geopolitical events can move both simultaneously.

How currency risk works

FX hedging — removing currency exposure

Currency hedging uses forward contracts or currency swaps to lock in the current exchange rate for a future date. A hedged ETF (labelled "GBP Hedged" or "£ Hedged") removes most currency impact — your return mirrors the underlying asset in sterling terms. Hedging has a cost: typically 0.5–1.5% annually depending on interest rate differentials between currencies. Whether to hedge depends on time horizon — over long periods, currencies tend to mean-revert, making hedging less critical. Over shorter periods, currency moves can dwarf asset returns.

Geopolitical risk — sudden and severe

Geopolitical events create risk that financial models cannot anticipate. Russia's invasion of Ukraine in February 2022 instantly: collapsed Russian equities 80%+ (MOEX index), froze foreign investors' Russian assets, caused European energy stocks to surge and airline stocks to fall, and drove commodity prices sharply higher. Investors who had significant Russian equity exposure lost essentially everything — the market closed, assets were frozen, and repatriation of funds became legally impossible.

The practical lessons

• Geographic diversification — never have more than 20–25% of equity exposure in a single country
• Avoid non-democratic regime exposure — Chinese equities, Russian equities, and similar have structural governance risks that don't appear in financial models
• Sanctions risk is real — assets can be frozen or made unsellable by geopolitical decisions entirely outside a company's or investor's control