Investors who believe sterling will weaken further this year are on the hunt for overseas opportunities enabling them to lock into strengthening currencies. Wealth managers say UK-based clients are buying into equities, bonds and property denominated in currencies other than sterling.
A weaker pound is not necessarily bad news for UK investments. It is generally positive for UK exporters as their products and services look cheaper compared with local providers abroad, while UK-based companies could also benefit as imports look less competitive.
But these benefits could be offset if the driving force behind the weaker currency was an economic slowdown, which could damage corporate earnings. Any further depreciation of the pound will also mean overseas investments become increasingly more expensive.
“Right now, we think clients should look overseas,” says Tom Elliott, global strategist at JPMorgan Asset Management. “They should lock into current rates if they think sterling will weaken further.”
At the same time, investors who are primarily exposed to other currencies, such as European or US nationals living in the UK, might be wise to hedge their portfolios against further depreciation of sterling.
“We think the pound is heading down further,” says Howard Archer, chief UK and European economist at Global Insight. “We see it falling to new lows against the euro, and while it could remain resilient against the dollar for a few months, later this year it could fall back fairly markedly.”
The pound has lost almost 10 per cent against the euro and 1.3 per cent against the dollar over the past six months, says ADVFN.
Gavin Rankin, head of products and services consulting at UBS Wealth Management in the UK, says how much this affects investors depends on their domestic currency. “If you live in the UK and your principal liabilities are there, the strength of sterling doesn’t really matter,” he says. “But anyone who has liabilities in another currency, such as a euro mortgage, could be negatively affected by falling sterling.”
For UK-based investors, the prospect of further sterling depreciation may encourage them to buy abroad sooner rather than later. Elliott says clients who are located in the UK often believe their stock market investment should be UK-focused, but this strategy may leave them with a narrow focus.
Funds that follow a benchmark, such as the FTSE 100 tend to be heavily weighted in a few sectors. “People risk ending up with a portfolio that is not that diversified,” says Elliott. “They may not be being as defensive as they think.”
And it is not all about currency. Elliott says the recent performance of Europe, the US and a number of emerging markets has been better than the UK. “Asia has seen strong growth, particularly India and China, while Europe is benefiting as consumers are not as overly borrowed as in the UK,” he says.
Rankin says a simple strategy for investors to mitigate the effects of a weakening sterling is to increase their allocation to non-sterling assets. Investors could also go into offshore funds, such as those based in Luxembourg, which are denominated in other currencies.
Elliott points out that investors might be better off going into diversified funds rather than individual overseas stocks. “Whether individual stocks go up or down depends more on factors such as the quality of management,” he says.
Another option is to open a bank account in a different currency. If you think the pound could weaken against the dollar, opening a US account would bring you benefits from dollar appreciation.
More active traders could take direct bets on currency movements using spread bets, for example.
HSBC Private Bank offers clients the chance to invest in a basket of currencies that it believes look undervalued compared with sterling. These include the Singapore dollar, Indian rupee, Philippine peso and Chinese yuan.
“Pound thinkers may want to make investments that take advantage of pound weakness,” says Charlie Hoffman, director of wealth management and investment at HSBC Private Bank.
Rankin warns that predicting short-term currency movements is no easy task for private investors.
“There are opportunities to make money in the short term,” he says, “but it is not something you can make an easy punt on.”
Investors whose domestic currency is not sterling may be more concerned about protecting existing investments, rather than actively trading a falling pound.
“Dollar thinkers exposed to sterling, for example, may think about hedging their exposure by using forwards,” says Hoffman.
Currency derivatives, or forwards, allow investors to lock into the present value of sterling. Investors are reserving the right to sell sterling at today’s price in three or six months’ time. This means they can continue to hold UK assets, but strip out the currency risk.
Pierre Lequeux, head of currency at ABN Amro Asset Management, says UK investors taking international exposure might now decide to leave their foreign investments relatively unhedged as any currency movements should be positive for them.
“The UK is already slowing and it is difficult to think that sterling will appreciate in this environment over the next six to 12 months,” he says.
