Who are the winners and losers from a weak pound?

Who are the winners and losers from a weak pound?

The value of the pound has been in the news recently, as FX markets faced huge gyrations after the chancellor's "mini" Budget.

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.

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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.


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. 

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.