A fistful of dollars

Jonathan Wright
Jonathan Wright
Fidelity Personal Investing25 January 2018

If you’re planning a trip to the United States this year, good news, your pound will go further. Over the last year the pound has been steadily rising against the US dollar, crossing $1.40 this week to reach a fresh post-Brexit high.

Growing optimism that Britain can secure a favourable Brexit deal and expectations of further interest rate hikes this year have helped the pound to climb.

In the wake of the European referendum result in June 2016, the pound collapsed from $1.50 to reach its lowest level against the dollar since the mid-1980s. British tourists heading to the States since then have certainly felt the pain. At its worst it slid as low as $1.20 last January, but has since gained ground during the course of 2017.

Meanwhile across the Atlantic, uncertainty over the US government shutdown this week and President Trump’s approval of tariffs on imports of solar cells and washing machines have further weakened the dollar, already hovering at three-year lows.

But what does this all mean for investors? Firstly, there’s always winners and losers with currency movements. The weak pound since the referendum has meant imports have become more expensive, causing consumer inflation to rise on essential items such as food. This has come at a time of low wage growth with households already struggling with rising bills and falling pay packets in real terms.

Conversely the weak pound has helped our exporters, providing a welcome boost to British manufacturers looking to sell overseas. It has also led to a record year for inbound tourism with 39.9m people visiting our shores, attracted by a favourable exchange rate.

Additionally the weak pound has helped the FTSE 100 cross the 7,000 mark. With 75% of earnings from the UK’s top 100 companies coming from overseas, the devaluation of sterling has provided a significant lift to these blue-chip companies, enabling them to share their profits in generous dividend payments.

With the yield on the FTSE 100 currently at 3.5%, it’s easy to see why investors have taken a higher risk by opting for shares rather than the relative safety of cash.

From an investment point of view the strengthening pound will also affect the value of the funds you hold that invest overseas. If you hold a fund investing primarily in US stocks you would have noticed it rise in value since the referendum, as profits made in US dollars were converted back into pounds. Now that the pound is gaining in strength, any further rises in US markets could be offset by currency fluctuations. However for those putting new money in, the stronger pound buys you more dollar-denominated shares for your money.

Meanwhile closer to home, for those investing in European funds, the pound’s performance against the euro has not been so favourable. Before the referendum the pound was at €1.30 and has remained pretty choppy ever since. At €1.14 today it is still a long way from the pre-referendum level but an improvement from last August’s low of €1.08. The euro has strengthened thanks to positive sentiment following elections in Germany and France and growing optimism the European Central Bank will signal a quicker exit than expected from its stimulus programme.

Whatever happens to the pound one thing you can be certain of is that currency fluctuations will always affect your returns, whether that’s when you go in or out of an investment. If you’re particularly lucky you may be able to time it perfectly, but in practice it’s best to be aware that currencies add a further risk which can work for or against you depending on when you buy or sell. If you stick to the UK, currency fluctuations still affect those larger multi-national companies listed in London that derive much of their profits overseas.

Either way it’s hard to escape the effects of currency movement but you can be prepared by building a well-diversified portfolio of funds investing in key world markets. Alternatively you could choose a global fund where the manager is not limited to a specific region when looking for stocks. They just go where the opportunities are. The Select 50 features five global funds, including the Rathbone Global Opportunities Fund, Invesco Perpetual Global Equity Income Fund and Fidelity Global Special Situations Fund.

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. The Select 50 is not a recommendation to buy or sell a fund. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.