Private investors can still find a way to profit from the weakness of the pound, according to investment advisers.
While sterling rose against the dollar and the euro this week, helped in part by a strong statement from Barclays that lessened the fear of bank nationalisations, it is still weak relative to other global currencies.
This is opening up opportunities in savings, investments and short-term trading – for those who know where to look.
Investors keen to play the weak sterling through equities are being advised to buy companies that pay dividends in dollars. A number of FTSE 100 stocks, such as GlaxoSmithKline and Diageo, qualify on this basis.
John Hardy, head of forex strategy at Saxo Bank, also suggests buying exporters that are not specialists in their fields, as those pricing in sterling will have an advantage over their competitors. Rolls-Royce is one example. Global bond funds, where managers are able to hedge the currency risk, are also an option.
Clients of private banks have been moving their money into non-sterling denominated accounts. Cater Allen Private Bank said recently that increasing numbers of clients had been shifting from sterling accounts into euros.
Others are locking in to exchange rates on cash cards that allow them to load up on euros or dollars ahead of a trip abroad.
Travelex, which offers a pre-paid currency card called the Cash Passport, reports that people have been locking into rates as currency falls become more extreme.
Another option is to invest in a global currency fund, where the manager takes a view on which currencies are likely to outperform. Investec Asset Management offers two of these funds.
One, the Currency Alpha fund, aims to outperform cash by 2 to 3 per cent. Last year, it returned 7.8 per cent but, with lower interest rates in the UK, it is likely to return less in 2009.
The Managed Currency fund, by contrast, is not based in sterling so offers a way for investors to diversify holdings out of the pound. Because sterling did so badly last year, the fund returned 32 per cent to investors – though Tim O’Dell, one of the portfolio managers, says the fund is unlikely to match that performance this year, because the pound is starting to look undervalued.
Spread betting on currency moves is also popular – but carries a high risk. Capital Spreads says that many of its currency traders would have lost money this week due to sterling’s rally, as most of them were shorting the pound.
“Currency trading is definitely not for the fainthearted,” warns Simon Denham at Capital Spreads.
Capital Spreads also reports more interest in trading the pound/euro as well as the pound/dollar, which is traditionally the more popular trade because of its higher volatility.
However, those now planning to start trading the pound need to consider whether it is likely to continue on its downward trend. Analysts’ views on this are mixed.
Caxton FX, the currency broker, thinks there has been no overall change in sentiment on the pound in spite of this week’s rally.
“Banks are still not lending and traders still have no faith in sterling. Until we see the recession slowing, sterling will remain weak against all the major currencies,” says Rupert Lee-Browne, Caxton FX chief executive.
But a number of analysts believe sterling could now be looking undervalued. “It’s one of the cheapest currencies so we wouldn’t be underweight in it at the moment,” notes O’Dell at Investec. “The pressures that have been pushing it down are being balanced by the draw of cheap investment, whether it be overseas tourists or exports.”
Hardy at Saxo Bank believes sterling is getting “excessively weak” and could soon strengthen against the euro.