A stronger pound – what does this mean for UK investors?

Author Aventur • 6th Sept 21

The latest market reports for July are out, and they’ve revealed some interesting insights that we can’t wait to unpack. So, let’s dive in!

First up, it’s no surprise that the presence of the delta Covid-19 variant meant it was yet another volatile month for the UK, with markets sold off in the first part due to the variant’s spread and the slowing growth outlook. It was not all doom and gloom, however, as markets recovered in the second half of the month, buoyed by a strong set of results from the financials, basic materials, and energy sectors. Plus, the Office for National Statistics reported the CPI rose by 2.5% in the year to June 2021, once again above Bank of England’s target rate of 2.0%. So far, so good.

As you could tell by the title, the reports also shared news of a stronger pound. Sterling was reported as the top performer in the G10 monthly currency rates for July, strengthening 0.75% against the US Dollar and 0.58% against the Euro. This sounds like good news for UK investors, right? Well, yes and no.

Allow us to explain.

The Bad News

We’ll start with the ‘bad’ news to get it out of the way. In July, UK equities did rise (ever so slightly), but the new strength of Sterling against the US Dollar and Euro meant large cap stocks with overseas earnings performed poorly, suppressing the main index.

What this means for anyone that holds investments overseas (particularly stocks), the money they earn now is worth less in pounds than it was before. For instance, should the pound increase by 5%, and all else remains equal, then any funds you have in global stocks will decrease in value by about 5% respectively (in £ terms). Put simply, the rising pound may decrease the value of your global investments.

To make things just a tiny bit worse, you could take a hit on your UK investments too. At the moment, Sterling is sitting higher than the US Dollar, but approximately three-quarters of the earnings of the UK’s top 100 listed companies come from overseas, which, you guessed it, often involve exposure to the US Dollar. Any earnings UK companies gain from the US Dollar will bear the brunt when converted back into pounds. Ouch.

It’s also worth remembering that a stronger pound makes British export goods more expensive to buy, so UK exporters may feel the pinch as buyers switch to cheaper alternatives. Generally, smaller more domestic-facing UK companies will fare better with a stronger pound than larger corporations.

The Good News

Okay, enough of the bad stuff. One of the positives of a strong pound is bragging rights. We’re not kidding, just bear with us! Being on top tells us a lot about the market sentiment in terms of how investors view the UK - which at the moment is in higher regard than they have previously. Strong Sterling makes the UK a more attractive proposition to foreign investors looking to gain a footing in overseas investments.

Even if a falling US Dollar negatively affects overseas earners, as mentioned earlier, the rising Sterling spells good news for UK stocks as people across the world want to get a slice of the pound pie. Any areas that might initially feel the pinch will likely be offset by any wider market recovery anyway.

What if you’re looking to spend rather than invest? A stronger pound means we are more wealthy than people in other countries, and your money will go further than it had previously. So, if you’re thinking of purchasing a foreign asset, then now’s the time to do it. Holiday home in the south of France? Yes, please!

How Do I Take Advantage?

The first thing to remember is that currency markets are volatile. Yes, the pound is strong at the moment, but there will come a time when it could fall and then rise again, and fall, and rise - you get the picture. Currency movements are incredibly hard to trace as conditions can change quickly and unpredictably. If you want to exploit them, you’re going to need to call a fortune teller. In other words, the attempt will likely be more trouble than it’s worth.

Instead, a more sensible view is to see how you can use the opportunity in a way that already aligns with your current financial goals. If you plan on moving abroad or buying a second home outside of the UK, then having funds in overseas stocks as well as the UK makes the most sense. A geographically diverse portfolio means that, despite currency fluctuations, your investments should balance each other out over time.

However, if you plan on eventually spending your money in the UK, then it’s key to factor in how you will be paying for these things - which could be anything from buying your first property, paying for schooling or a pension fund. Want any of these in the UK? Then no surprise, you’re going to be paying in pounds. Investing in overseas currencies that decline as the pound goes up is doing yourself a disservice. Depending on your goals for your wealth, now might be a good time to think about your future spending and scrutinise whether overseas investments are working for or against you.

The Bottom Line

Ultimately, everyone’s financial goals are unique, which is why at Aventur, we use a hybrid approach to investing that allows you to take complete control of your money. No matter how the currency markets fluctuate, you can always rely on our team of financial experts to help you manage your money in a way that suits you.

Get in touch today to see how we can help you.

Sources

https://collidr.com/ https://www.fidelity.co.uk/markets-insights/markets/uk/what-stronger-pound-means-your-investments/
https://www.tindlewealth.com/rising-pound.html
https://www.fool.co.uk/investing/2019/10/24/how-a-stronger-pound-could-affect-your-ftse-100-investments/
https://www.fidelity.co.uk/markets-insights/markets/uk/rising-pound-can-be-good-and-bad-news/


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