Source: Investing.com from 14.9.33 to 12.9.23
The pound’s recent weakness is undeniably a concern, not least because international commodities priced in dollars – including oil – place additional cost pressures on British businesses and consumers at a time of already high inflation.
There are, however, a number of ways in which investors can help offset or even benefit from some of the effects of a weak pound. One way is to invest in the UK stock market.
This is not as strange as it may first sound. At the last count, 82% of the revenues of FTSE 100 companies were earned in foreign currencies. Even more surprising, perhaps, is that around 57% of the earnings of FTSE 250 businesses also come from abroad3.
For this reason as much as any other, the UK stock market has shown considerable resilience over the summer, even in the face of weak economic data and falling house prices. A weak pound has been boosting the sterling-equivalent revenues of the vast majority of listed British businesses.
For fund ideas the Fidelity’s Select 50 has five options in the UK category, including low cost trackers such as the iShares Core FTSE 100 ETF and the Vanguard FTSE 250 ETF.
As ever though, diversification counts for a lot when markets are volatile, and that includes big moves in currencies. Holding investments in overseas companies or funds as well as in the UK, can make a significant difference to the returns a sterling investor sees over time. Again the Select 50 can help here offering fund options covering all the key global markets.
A weak pound is by no means a one-way bet. Should surer signs emerge that inflation has finally been quashed stateside, American interest rate expectations and the dollar could quite easily move into reverse.
Ultimately, the Federal Reserve is now severely limited in the extent to which it can raise interest rates if it wishes to avoid causing a US recession.
So, just as the pound has fallen sharply against the dollar over the past couple of months, so it could rise should expectations change. In any event, portfolios that encompass a broad set of currency exposures stand to be less affected by short term movements in the pound and promise their investors a smoother ride.
Finally, the pound is now only slightly undervalued on the basis of buying power estimates.
The Economist’s Big Mac Index offers a light-hearted way of showing how currencies measure up by comparing the price of a McDonald’s Big Mac in various countries. In July 2023, a Big Mac cost £4.19 in the UK versus $5.58 in America.
Based on exchange rates and the assumption that goods should cost roughly the same in both countries, this suggests the pound was about 3.4% undervalued in July compared with around 13% in January4.
Sources:
1 Bloomberg, 23.09.22
2 Bloomberg, 15.09.23
3 FTSE Russell, 18.10.22
4 The Economist, 03.08.23
