If you predicted that, after all that talk about “fixed term” parliaments, we’d be having a general election in 2017, go to the top of the class and take a gold star. To a lot of people, it came as a big surprise. The pound promptly rose to a six-month high, which made it a pleasant surprise for people who believe, as BBC Economics Correspondent, Mark Broad put it, that “The value of a nation’s currency is often described as its effective share price – a gauge of how investors see the strength of the economy.”
If the pound’s recovery turns out to be more than the proverbial dead cat bounce, this may affect your investments in several different ways. For example, a strong pound can make buying foreign shares more affordable. In the short term, though, as some blue-chip companies pay dividends in dollars, the real size of any dividends they pay may fall as the pound rises. A strong pound benefits UK consumers so, other things being equal, companies that can successfully sell into the UK market should generate better returns with a strong pound. This might make FTSE 100 companies look, on average, less attractive to UK investors than FTSE 250 companies (FTSE 100 companies make around 80 per cent of their sales overseas, while for FTSE 250 companies, foreign sales make up about half of the total).
Although the pound’s six month high may sound impressive, in historical terms, we’re a long way off seeing anything you’d call a strong pound, though. Between late June 2016 and the end of September, the pound has stuck at less than $1.35 US dollars. Ever since then it’s been below $1.30, although the recent rally touched $1.28.
To put this in context, fifty years ago the pound (which had just been devalued) had an exchange rate fixed at $2.40. From 1971 (when the fixed exchange rate was finally abandoned) to last June, the pound has only dipped below an exchange rate of $1.40 only once before. That was for a few months around March 1985. The mid-eighties dip was caused by the strength of the dollar, rather than Sterling’s weakness. In order to bring down the levels of inflation seen in the 1970s, the US Federal Reserve had aggressively raised US interest rates in the early 1980s, steeply increasing the dollar’s value, which peaked in March 1985, in exactly the same month when the pound fell to its lowest ever dollar value, (just six cents above parity).
By this stage, US exporters were getting understandably twitchy about what the sky-high dollar was doing to their competitiveness and successfully lobbied their government to do something. That something was the Plaza Accord, an agreement with France, West Germany, Japan, and the United Kingdom, to intervene in currency markets in to devalue the US dollar in relation to the Japanese yen and West German Deutsche Mark, which duly brought the value of the dollar down to earth again. A glance at an exchange rate graphs shows a steep-sided v-shaped spike in the dollar value, peaking at exactly the same point where the v-shaped valley of the pound-dollar exchange rate bottoms out. For people who like that sort of thing, the symmetry is as pleasingly beautiful as a steep mountain reflected in a still lake (OK, those people probably need to get out more).
So, for now, we’re still looking at an unusually weak pound. Whether Sterling stays weak, or climbs back to its historic +$1.40 exchange rates, recent events have shown that even half-century long trends can be bucked and that currency markets, like elections, don’t always follow the patterns we’re familiar with. While you shouldn’t make the impact of exchange rate movements your sole reason for buying or selling a stock, especially if you’re a long-term investor, it can make sense to hedge against the effects of currency fluctuations with a globally diversified portfolio. Not everybody is at ease in the world of globally diversified portfolios, but low pound or high pound, if you get in touch with our professional financial advisors, they can help you to make sense of a changing market and invest your hard-earned money where it works best for you.
The information in this article is for general information purposes only and does not constitute financial advice. You must not rely on the information in this article as an alternative to financial advice from an appropriately qualified professional. If you have any specific questions about any matter you should consult an appropriately qualified professional.