Britain’s deepening political crisis has left the pound behaving more like an emerging market currency, according to analysts.
It has certainly been a highly-volatile week for sterling. On Tuesday morning the pound fell to its lowest level since October 2016 as investors braced for a pivotal day in parliament. The value of the pound fell by as much as 0.8% to $1.197; breaching the all-important “psychological barrier” at $1.20 and sending it to its lowest level since four months after the 2016 EU referendum. To put that in perspective, the pound has not regularly traded below $1.20 since the mid-1980s.
Of course, what goes down tends to go back up and no sooner had the Boris Johnson’s government failed to prevent MPs from making an attempt to rule out leaving the EU without a deal, then the pound bounced back to trade near $1.22.
Yesterday it rose above $1.23; taking it more than 3% higher than it started the week at.
The wild swings are often momentary, but the fact remains that a 1.2% swing in the pound on two consecutive days of trading is highly unusual by the standards of major currencies; hence the comparison with emerging market currencies.
When analysts start likening the British pound to an emerging market currency you know you’re in for a bumpy ride and those in the options markets, which are used to hedge against or profit from currency moves, suggest that there is little belief among investors that the risks for the pound are going to ease any time soon. The fact that intraday movements in the pound have grown more extreme, not less so, also suggests otherwise.
Currency markets dislike uncertainty and the political uncertainty, which has bordered on constitutional crisis on more than one occasion already, is understandably not being taken well by the market.
For options markets, that need to be able to determine some sort of probable path in the near to medium term, the difficulty in doing that means that the high risk of large swings in the value of the pound is the most likely scenario going forwards. At least for the short term, as we near the 31 October Brexit deadline. But also in the 12 months or so after that, when the threat of a general election (if it hasn’t happened sooner) will also continue to weigh heavily on the performance of the pound.
For investors, the volatility of sterling can seem like yet another negative in an already challenging environment. But, of course, the weak pound can be a positive for investors.
The FTSE 100 index of leading stocks is chock full of foreign companies who do very well when the pound falls. What a company earns from its investments overseas can be critical when the foreign exchange in its tills is converted back into sterling.
A British company operating overseas at a time when the pound is weak can either choose to reduce or hold back its prices to help gain market share or keep its prices the same and take a bigger profit on each item it sells.
As an investor, keeping your portfolio diversified and including a mix of UK and non-UK earners is a wise move.
Fidelity’s Select 50 list includes several highly respected UK equity funds with contrasting investment approaches. The LF Lindsell Train UK Equity Fund is a good place to find UK multinationals. Its relatively concentrated portfolio features long-term investments in a number of global consumer groups, including Diageo, Unilever and Burberry.
Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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Market volatility can feel like an investor's worst nightmare. But if you take a few simple steps to prepare, you can keep a calm head when it arrives.