Sterling is giving many other world currencies a pounding, so investors need to look at how a strengthening British country affects their stakes in economies with weaker or more volatile currencies.
Although the value of the Pound has shrunk in recent years against the dominant US dollar – from around $2 to 31 in 2008 to nearer $1.50 today, the Pound is still near the top of the pile compared to most other currencies.
Carl Howard, commercial director at TD Direct Investing has looked at what this means to investors and suggests some strategies to protect and grow wealth.
He argues that the Pound buys more in Europe – rising from 1.1 euros to £1 in 2008 to 1.4 today and plenty more compared to a basket of international money.
However, a strong currency has two effects – weak currencies make products and services more competitive for some industries, cheapening exports, while a strong currency has a reverse effect on an economy.
Watch currency movements
“Looking at the FTSE, FTSE 100 firms generate 80% of sales from outside the UK, while the figure is around 50% for FTSE 250 companies,” said Howard.
“That means looking at how companies benefit or are disadvantaged by international sales and focusing on those with managers who can understand and react to the risks of currency movements.”
His tip for investors is looking at ‘constant currency’ results to reveal whether a business is sound, while traders or currency speculators need to seek out the opposite to exploit a chance for profit.
Another tip is sorting the exporters who suffer from a strong Pound making their products more expensive – these companies typically have costs in Sterling but earnings in other currencies.
Winners and victims
The usual scenario for these firms is absorbing rises in costs to keep prices competitive in foreign markets, which reduces profits. The big victims here are often pharmaceutical companies, he explains.
Mining firms gain, because most of their costs are incurred overseas and commodity prices tend to be priced in US dollars, so these companies are likely to be more stable when a currency is strong.
“Don’t overlook a strong pound helping out consumers,” said Howard. “Holidays in Europe are cheaper because of where the Pound and Euro sit against each other, so travel and leisure firms with costs paid out in Euros are benefitting from a stronger Pound.”
Lastly, Howard warns to watch out for firms paying dividends in US dollars, as investors lose out on the exchange rate with the Pound.