Currencies 

What your clients need to know about currency exposure

  • Identify how currency effects can impact UK assets.
  • List the benefits and risks posed by holding foreign currency assets.
  • Describe how clients might respond to currency risk in their portfolios.
CPD
Approx.30min
What your clients need to know about currency exposure

Markets are like complex ecosystems.

Multiple variables are linked via a dense web of interdependencies.

One complex factor with a huge bearing on global asset prices is currency movements.

Big changes in the value of sterling over the past year or two have illustrated the importance of currency effects and the value of factoring this into portfolio construction.

We examine currency effects closely and they are an important factor to consider when assessing the merit of a wide array of regions and asset classes.

Here, we look at how currency effects can impact on UK assets; the impact on holders of foreign currency assets; and the potential benefits and risks this poses; as well as reviewing how investors might respond to currency risk. 

Sterling since 2016

Currencies trade everyday on global financial markets in huge volumes and their relative value to one another can shift significantly over time.

Investors buying assets in a foreign currency can find those changes create a distorting effect which influences the value of their portfolio more than the intrinsic value of the underlying assets. 

Starting close to home, sterling experienced a sustained spell of weakness following the EU referendum in June 2016, and the decline in the value of the pound in 2018 alone was particularly marked.

In 2016, when the UK public went to the polls to vote on the UK’s future relationship with Europe, the pound was worth around $1.40 to $1.45. Over the past few months it has traded between $1.25 to $1.34.

That is a significant drop in a relatively short period of time.

In the months shortly after the vote, sterling experienced a lengthy sell-off and although it did stage a recovery in early 2018, it has since become notably sensitive to rhetoric around the Brexit outcome.

As politicians in Europe and the UK have speculated about the possible outcome, and the UK government jostles with competing interests to try and get a deal over the line, the value of the pound has correspondingly fallen and risen in line with the market’s level of concern about the possibility of a disorderly or no-deal Brexit.

That has a significant bearing on UK-listed equities. Domestically-focused companies selling goods in pounds but importing materials from overseas may suffer, for example.

This is because their cost of acquiring materials abroad goes up, but this is not counteracted by a similar effect in foreign earnings if they only sell to domestic clients.

In contrast, however, international firms deriving sales from overseas jurisdictions are likely to benefit from a weaker pound. And this is where things may begin to become counterintuitive to some clients - how can a fall in the value of the pound benefit a UK-listed business?

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. According to the author, when did sterling stage a recovery following the referendum?

  2. A UK listed company selling goods in the US needed to make sales of approximately how much to make £10m of revenues in the summer of 2016?

  3. Positive earnings reports and share price appreciation in 2018 was led by which types of companies?

  4. Is the following statement true or false? "In the first quarter [of 2018], sterling in fact rallied against the dollar, breaching $1.40 to the pound in April."

  5. Amid the current Brexit uncertainty, the author says people's natural inclination is to sit tight and to favour what type of assets?

  6. Currency effects can be considered both a valuable diversifier and what?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Identify how currency effects can impact UK assets.
  • List the benefits and risks posed by holding foreign currency assets.
  • Describe how clients might respond to currency risk in their portfolios.

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