Since the 2016 referendum the pound has fluctuated in value, reflecting the varying degrees of confidence that investors have had in the currency, given the various potential Brexit outcomes. After an initial fall from $1.50 to below $1.30 in the aftermath of the referendum, sterling reached a post referendum high of $1.43 in April 2018, when it seemed as though the Bank of England might raise interest rates. In 2019, sterling reached a trough of just below $1.20 in July 2019, following the rhetoric from new Prime Minister Boris Johnson’s government about the increased likelihood of the UK leaving the EU without a deal, however the significant victory of the Conservative party in the UK general election on 12 December pushed the currency above $1.35, its highest level since May 2018, as a 31 January 2020 Brexit became more certain.
Overall the depreciation of sterling versus most major currencies over the past three-and-a-bit years, has had the effect of increasing the sterling value of assets denominated in other currencies. For example, the US stock market delivered an annual return of around -4.5% in US dollar terms in 2018, but a modest gain of 0.7% in sterling terms. Similarly, the gains of US technology assets have been amplified for UK investors. This currency translation will have increased the value of overseas denominated assets in sterling.
In addition, any UK companies, which report their earnings in overseas currencies such as the US dollar, will also have benefited from the currency translation back to sterling. Given that roughly 80% of FTSE 100 companies’ earnings are derived from overseas, this is the reason why the index tends to rise when sterling falls and vice versa. However, more domestically orientated companies will tend to struggle when the pound falls as it may cost them more to produce their products/goods because of the increased costs of overseas materials.
The increased certainty over the timing of the UK’s exit from the European Union has helped boost the currency, which in turn has benefited UK small and mid-sized companies, however, there is still the matter of a trade deal to be worked out before the end of December 2020, and so there is the possibility that sterling will be further buffeted by dramatic headlines as the deadline draws nearer. Of course, fluctuating currencies are nothing new but it may benefit investors to consider holding a well-diversified portfolio that can adapt to the changing environment and engage with their financial adviser about any concerns they have so that any bumps in the path of sterling should not be a major obstacle on the investors’ journey.
