Who are the winners and losers from a weak pound?

Last month, after Kwasi Kwarteng announced £45bn in unfunded tax cuts, sterling crashed to its lowest value against the dollar seen in years.

One of these policies, the abolition of the 45p income tax rate, was reversed this morning (October 3) prompting a recovery of the pound, which is currently worth $1.12.

However, uncertainty still remains in financial markets, including the gilt market which saw yields rise so high that the Bank of England was forced to intervene.

FTAdviser has taken a look at who is set to benefit from the falling pound, and who will lose out.

Winners

Investors with exposure to global or US funds

UK investors in US or global funds which are denominated in dollars are currently benefiting from the strength of the dollar.

Although investors are buying US funds with pounds, the funds will have seen a boost in the relative value of the funds' investments.

The IA’s North America sector has lost 6.89 per cent in the past three months, according to FE Fundinfo, however the strength of the dollar will have artificially inflated the value of the underlying assets in comparison to the pound. 

With such economic uncertainty, having a barbell approach within bond portfolios makes senseGavin Hayes, Whitechurch

The equivalent return for the same sector in pounds is 6.32 per cent, giving UK investors a 12 percentage point advantage.

Although it feels too late to invest in traditional index-linked bonds, which are tied to CPI, there are parts of the market that are worth a look, said Gavin Hayes, managing director at Whitechurch.

“With such economic uncertainty, having a barbell approach within bond portfolios makes sense, between areas such as short duration high yield...and longer dated higher quality government bonds to provide insurance against a backdrop of recession where inflation would be expected to fall back and defaults increase.”

Contrarian investors could looks at the FTSE 250, said Dzmitry Lipski, head of funds research at Interactive Investor.

“The growth incentives could benefit small and mid-sized firms which have been underloved, if we see a stronger economy emerge from the mini-Budget last week.”

For investors looking for a tracker, Lipski recommended the Vanguard FTSE 250 UCITS ETF, and for those looking for active funds, he suggested Henderson Smaller Companies investment trust or the Amati UK Listed Smaller Companies fund.

Some DB pensions

The wider impact of the mini-Budget released on Friday includes falling bond prices.

These will have caused DB pensions’ liabilities to fall sharply, as of the approximately £1.5tn in assets held by UK pension funds, a weighted average of 72 per cent of these were invested in bonds in 2021, according to the Pension Protection Fund’s Purple Book. 

Scheme liabilities fall as gilt yields go up, as the price of the underlying bond goes down.

For DB pension schemes the rise in gilt yields has mostly been good newsIan Mills, Barnett Waddingham

Ian Mills, partner at Barnett Waddingham, said: “For DB pension schemes this [rise in gilts] has mostly been good news – these schemes value their liabilities by reference to gilt yields and, for most, rising yields means an improving funding position.

"Importantly, most DB pension schemes’ funding positions will now be stronger than they were a week ago."

Pensions have more of a global exposure than previously and so are more susceptible to wider market fluctuations, added Becky O’Connor, head of pensions and savings at Interactive Investor.

"That may be reassuring given what is happening in the UK, but perhaps cold comfort given monetary tightening is still far from over in the US, as this could have a further dampening effect on equity markets," she said.

Losers

Pension funds holding liability driven investment strategies

However, some DB schemes face collateral calls in order to maintain their hedges on interest rates. 

Some of our investment consultants are of the belief that everything nearly ended for LDI [last week]Unnamed consultant

It was these products, and their impact on DB pensions' liquidity, that forced the BoE to suspend its bond buying programme.

LCP partner Dan Mikulskis observed on Twitter that these hedges “will have suffered big mark-to-market losses and will need more collateral to be placed to maintain exposures”. Schemes will generally want to do this, he added.

One consultant, who did not wish to be named, said: “Some of our investment consultants are of the belief that everything nearly ended for LDI [last week].”

Homeowners and landlords at the end of their rate fix

Hundreds of mortgage products have been withdrawn as a result of market fluctuations.

Lenders including Santander and HSBC removed their products from the market amid concerns that the "mini" Budget could prompt the Bank of England to hike interest rates, with many recalling all their fixed rate products as they scrambled to re-price them in light of soaring gilt yields.

Since the "mini" Budget, brokers have said the Financial Conduct Authority could find itself intervening in the mortgage lending market for years to come due to the sharp rise in mortgage rates.

Foreign holidays may start to be seen as a new status symbolPaul Craig, Quilter

The regulator entered into talks with lenders last week amid fears the daily repricing of mortgage interest rates has stretched many borrowers too far.

Landlords will also be impacted, with the majority of lenders pulling their fixed rate products from the market.

Some 37 lenders have pulled their fixed rate products for buy-to-let borrowers in recent weeks, with more expected to be pulled in the coming days. 

Those on a fixed income 

The UK is particularly exposed to fluctuations in its currency, as it imports more than it exports.

The purchasing power of the pound has been eroded, meaning that anything bought overseas is now more expensive. This will push up prices further, causing higher inflation, which has already soared well past the Bank of England’s target since last May.

This will hit anyone on a fixed income hard, including those relying on a state pension.

Pensioners will have seen their payouts drop in real terms this year, as the suspension of the triple lock meant the state pension was increased by 3.1 per cent this April despite inflation running higher.

Expat pensioners will see this compounded by the weakness in the pound, with analysis from Ebury showing that pensioners in the Eurozone will have seen the purchasing power of their pension drop by 17 per cent this year, before inflation is taken into account.

Expat pensioners have long been vulnerable to movements in currency markets, said managing director of Ebury Mass Payments, Owain Walters.

“Unfortunately, for those moving away from the UK for their dream retirement abroad, the drop in the value of the pound on the back of the recent political and economic turmoil will significantly decrease their living standards,” he said.

Holidaymakers

This also means anyone exchanging sterling into foreign currencies 

If the Bank of England doesn’t get the pound under control, it could have a big impact on holidaymakers’ plans, said Paul Craig, portfolio manager at Quilter.

“If we do see the BoE get its interest rate guns out, we may start to see some interest in the pound return. 

“Otherwise foreign holidays may start to be seen as a new status symbol.”

slly.hickey@ft.com