Advisers should be wary of weak pound, warns Natixis

Advisers should be wary of weak pound, warns Natixis

Natixis Global Asset Management has warned advisers that sterling’s weakness, which has boosted returns from overseas assets, could threaten investments further down the line.

The group’s portfolio barometer, which analysed 103 model portfolios, said the weak pound continues to benefit advisers who invest in unhedged non-UK assets.

But it pointed out that when the sterling floor has been reached, advisers will need to address the currency exposure in their portfolios because the UK will be hit with weaker economic conditions and higher import costs.

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“Currency has worked for advisers in recent quarters but this may not hold true in quarters ahead,” the report stated, adding it is impossible to predict where sterling will head next. 

James Beaumont, international head of portfolio research at Natixis, said he thinks currency volatility is here to stay and is likely to remain high.

“Therefore currency needs to be considered by advisers as an investment decision on its own,” he said, adding currency exposure is a more material asset allocation decision than a call on the asset class itself.

The value of the pound reached peak levels in summer last year, but since then  has been in consistent decline, plunging after the Brexit referendum in June.

Natixis said advisers fared well over the EU referendum, mainly due exposure to equities where they typically do not hedge currency risk.

In October sterling's slump against the other three major currencies, the dollar, euro, and the Japanese yen, emphasised these positive returns even more.

Looking at the domestic market, Natixis said it would expect domestically-oriented businesses to struggle with increased input costs if those costs are derived abroad from imports.

These companies could also come under pressure on the domestic demand side if the UK economy slows, therefore impacting earnings.

This issue was highlighted by the ‘Marmite-gate’ row between Unilever and Tesco over who should bear the costs of the price increases as a result of sterling’s weakness.

Ben Yearsley, investment director at the Wealth Club, said: "I agree we have been through a period of high uncertainty for sterling, which in theory will last until Brexit actually happens.

But he said that if a favourable deal is negotiated, sterling might rebound. 

"Currency volatility will be here to stay for the foreseeable future and does need to be factored in to investment asset allocation decisions.

"You only need to see how sterling has moved this year, for example against the yen, to see the impact on client portfolios, where the strong yen against sterling has more than made up for the Japanese stock market falling." 

But Mr Yearsley warned there is a danger of trying to be too clever, pointing out for example that those advisers who hedged out currency risk from overseas investments this year will have missed a lot of growth.

"Arguably now could be a good time to put a sterling hedge on now, or at least switch to unit classes that hedge out the currency risk, but who is to say that sterling won't fall further?