The Falling Pound – What It Means For You
30 July 2019
What happened?
The value of the pound is today hovering near its lowest level in two years versus both the US dollar and the Euro. The pound has fallen almost 10% against the US dollar since March and 4% this month alone. The catalyst for this move lower is almost universally identified as a ‘no deal’ Brexit becoming more likely although some attribution should probably also go to the rising risk of a general election.
Whatever the cause, when a fall in the pound makes headlines it naturally leads people to consider how it affects them – and this article is aimed at helping you answer that question for yourself.
Yes, your overseas holiday just got more expensive
Except for the costs that you have already paid, any overseas trip you take in the coming weeks will cost you about 5% more (in sterling terms) than it would have a month ago. Bad luck. If this is an issue for you, it’s probably better to find ways to reduce your expenses while on holiday rather than scramble to hedge your FX exposure now. No one can tell you, with any degree of certainly, how the value of sterling will change between now and your next shot of grappa.
Your international investments - if you have them - have almost certainly gone up in value
If you have investments and if they are spread across different countries – for example, by investing in stocks globally – then your investment account has very likely benefitted from sterling’s swoon. Even the FTSE 100 – the collection of stocks that make up Britain’s 100 biggest publicly traded companies – has been pushed up by the fall in sterling. This is because many of those companies earn the majority of their profits outside of Britain, and so investing in them is very similar to investing in big companies in Europe or the US.
Your UK investments haven't necessarily gone down in value – but your living expenses might start increasing soon
Sterling could fall 20% against the US dollar and your bank balance would be unchanged. So what’s the big deal? Britain imports so many things from abroad that a fall in sterling means the cost of those things go up. For example, the cost of fuel goes up – pushing up the cost of driving as well as the delivery of goods. Such moves usually take some time to feed through – so sterling would have to maintain its recent weakness over a period of months before you are likely see a meaningful effect on your wallet.
So what can you do?
This is where the relatively simple explanations and examples above get more complicated – and more personal.
Your own exposure to the value of sterling depends on your own circumstances and, crucially, your future plans. If you a ‘born and bred’ Brit who is unlikely to live anywhere else then a falling pound might create somewhat of a hit to your budget in the form of higher grocery bills and more expensive holidays. But if you have a solid job and can be reasonably confident that your future pay will increase at about the same rate as your costs, then this may not be something that should overly concern you. Additionally, if you’re fortunate enough to have significant investments, having some of your money invested outside of the UK would cushion that blow as those investments would increase in value.
But your risk is much higher if you’re an internationally mobile person who works in London and is likely to move abroad in the future. Earning and saving in sterling while your future liabilities are likely to be in a different currency creates a significant mismatch – one that should probably be rectified via your investment portfolio.
Finally, the ‘born and bred’ Brits discussed earlier might be over-exposed to international investments. Recently, that’s been a good position to be in – as the pound has fallen you would have reaped the rewards. However, despite the present doom and gloom surrounding the pound, there is a reasonable probability that sterling will increase relative to other currencies in the coming years. In such a scenario, Brits would see their international investments fall in value, all else being equal. Since their future liabilities – things like school fees, future house purchases, retirement and care homes – are priced in sterling, an over-exposure to international markets is risky. Right now it seems as though this is a conversation for a day when Brexit risks are not so prevalent – but it is a risk nonetheless. Owning stocks and bonds that are more exposed to the UK economy and the pound is a useful offset to this risk.
The bottom line is that your exposure to the value of the pound depends on your own particular circumstances – and your investment portfolio should take this into account.
--
Scott Tindle, CFA is the Founder & Director of Wealth Management at Tindle Wealth Management
Disclaimer: This is not meant to be investment advice specific to any individual; it is for informational purposes only.
Read Scott's previous article: The Woodford Saga – Explained
The value of the pound is today hovering near its lowest level in two years versus both the US dollar and the Euro. The pound has fallen almost 10% against the US dollar since March and 4% this month alone. The catalyst for this move lower is almost universally identified as a ‘no deal’ Brexit becoming more likely although some attribution should probably also go to the rising risk of a general election.
Whatever the cause, when a fall in the pound makes headlines it naturally leads people to consider how it affects them – and this article is aimed at helping you answer that question for yourself.
Yes, your overseas holiday just got more expensive
Except for the costs that you have already paid, any overseas trip you take in the coming weeks will cost you about 5% more (in sterling terms) than it would have a month ago. Bad luck. If this is an issue for you, it’s probably better to find ways to reduce your expenses while on holiday rather than scramble to hedge your FX exposure now. No one can tell you, with any degree of certainly, how the value of sterling will change between now and your next shot of grappa.
Your international investments - if you have them - have almost certainly gone up in value
If you have investments and if they are spread across different countries – for example, by investing in stocks globally – then your investment account has very likely benefitted from sterling’s swoon. Even the FTSE 100 – the collection of stocks that make up Britain’s 100 biggest publicly traded companies – has been pushed up by the fall in sterling. This is because many of those companies earn the majority of their profits outside of Britain, and so investing in them is very similar to investing in big companies in Europe or the US.
Your UK investments haven't necessarily gone down in value – but your living expenses might start increasing soon
Sterling could fall 20% against the US dollar and your bank balance would be unchanged. So what’s the big deal? Britain imports so many things from abroad that a fall in sterling means the cost of those things go up. For example, the cost of fuel goes up – pushing up the cost of driving as well as the delivery of goods. Such moves usually take some time to feed through – so sterling would have to maintain its recent weakness over a period of months before you are likely see a meaningful effect on your wallet.
So what can you do?
This is where the relatively simple explanations and examples above get more complicated – and more personal.
Your own exposure to the value of sterling depends on your own circumstances and, crucially, your future plans. If you a ‘born and bred’ Brit who is unlikely to live anywhere else then a falling pound might create somewhat of a hit to your budget in the form of higher grocery bills and more expensive holidays. But if you have a solid job and can be reasonably confident that your future pay will increase at about the same rate as your costs, then this may not be something that should overly concern you. Additionally, if you’re fortunate enough to have significant investments, having some of your money invested outside of the UK would cushion that blow as those investments would increase in value.
But your risk is much higher if you’re an internationally mobile person who works in London and is likely to move abroad in the future. Earning and saving in sterling while your future liabilities are likely to be in a different currency creates a significant mismatch – one that should probably be rectified via your investment portfolio.
Finally, the ‘born and bred’ Brits discussed earlier might be over-exposed to international investments. Recently, that’s been a good position to be in – as the pound has fallen you would have reaped the rewards. However, despite the present doom and gloom surrounding the pound, there is a reasonable probability that sterling will increase relative to other currencies in the coming years. In such a scenario, Brits would see their international investments fall in value, all else being equal. Since their future liabilities – things like school fees, future house purchases, retirement and care homes – are priced in sterling, an over-exposure to international markets is risky. Right now it seems as though this is a conversation for a day when Brexit risks are not so prevalent – but it is a risk nonetheless. Owning stocks and bonds that are more exposed to the UK economy and the pound is a useful offset to this risk.
The bottom line is that your exposure to the value of the pound depends on your own particular circumstances – and your investment portfolio should take this into account.
--
Scott Tindle, CFA is the Founder & Director of Wealth Management at Tindle Wealth Management
Disclaimer: This is not meant to be investment advice specific to any individual; it is for informational purposes only.
Read Scott's previous article: The Woodford Saga – Explained